-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PQ58SWtKTs3G+5G5xTh3FEQyFrmh5y8ID39Gwmp5iFQ8Pt0XkqoZiRO/3hFrzE68 25APNdp5m5a9sbCkL3jgoQ== 0000898430-98-003896.txt : 19981110 0000898430-98-003896.hdr.sgml : 19981110 ACCESSION NUMBER: 0000898430-98-003896 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981109 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HAWAIIAN ELECTRIC INDUSTRIES INC CENTRAL INDEX KEY: 0000354707 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 990208097 STATE OF INCORPORATION: HI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-08503 FILM NUMBER: 98740094 BUSINESS ADDRESS: STREET 1: 900 RICHARDS ST CITY: HONOLULU STATE: HI ZIP: 96813 BUSINESS PHONE: 8085435662 MAIL ADDRESS: STREET 1: 900 RICHARDS STREET CITY: HONOLULU STATE: HI ZIP: 96813 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HAWAIIAN ELECTRIC CO INC CENTRAL INDEX KEY: 0000046207 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 990040500 STATE OF INCORPORATION: HI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-04955 FILM NUMBER: 98740095 BUSINESS ADDRESS: STREET 1: 900 RICHARDS ST CITY: HONOLULU STATE: HI ZIP: 96813 BUSINESS PHONE: 8085437771 MAIL ADDRESS: STREET 1: 900 RICHARDS STREET CITY: HONOLULU STATE: HI ZIP: 96813 FORMER COMPANY: FORMER CONFORMED NAME: HAWAIIAN ELECTRIC CO LTD DATE OF NAME CHANGE: 19670212 10-Q 1 QUARTERLY REPORT FOR PERIOD ENDED 09/30/98 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Exact Name of Registrant as Commission I.R.S. Employer Specified in Its Charter File Number Identification No. - --------------------------- ----------- ------------------ HAWAIIAN ELECTRIC INDUSTRIES, INC. 1-8503 99-0208097 and Principal Subsidiary HAWAIIAN ELECTRIC COMPANY, INC. 1-4955 99-0040500 STATE OF HAWAII - -------------------------------------------------------------------------------- (State or other jurisdiction of incorporation or organization) 900 RICHARDS STREET, HONOLULU, HAWAII 96813 - -------------------------------------------------------------------------------- (Address of principal executive offices and zip code) HAWAIIAN ELECTRIC INDUSTRIES, INC. ----- (808) 543-5662 HAWAIIAN ELECTRIC COMPANY, INC. ------- (808) 543-7771 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) NONE - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) ================================================================================ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No --- --- APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Class of Common Stock Outstanding November 3, 1998 - --------------------------------------------------------------------------------------------------------- Hawaiian Electric Industries, Inc. (Without Par Value).......... 32,071,530 Shares Hawaiian Electric Company, Inc. ($6 2/3 Par Value).............. 12,805,843 Shares (not publicly traded)
================================================================================ Hawaiian Electric Industries, Inc. and subsidiaries Hawaiian Electric Company, Inc. and subsidiaries Form 10-Q--Quarter ended September 30, 1998
INDEX PAGE NO. Glossary of terms........................................................... ii PART I. FINANCIAL INFORMATION Item 1. Financial statements Hawaiian Electric Industries, Inc. and subsidiaries --------------------------------------------------- Consolidated balance sheets (unaudited)- September 30, 1998 and December 31, 1997.................... 1 Consolidated statements of income (unaudited)- three and nine months ended September 30, 1998 and 1997..... 2 Consolidated statements of retained earnings (unaudited)- three and nine months ended September 30, 1998 and 1997..... 3 Consolidated statements of cash flows (unaudited)- nine months ended September 30, 1998 and 1997............... 4 Notes to consolidated financial statements (unaudited)........ 5 Hawaiian Electric Company, Inc. and subsidiaries ------------------------------------------------ Consolidated balance sheets (unaudited)- September 30, 1998 and December 31, 1997.................... 12 Consolidated statements of income (unaudited)- three and nine months ended September 30, 1998 and 1997..... 13 Consolidated statements of retained earnings (unaudited)- three and nine months ended September 30, 1998 and 1997..... 13 Consolidated statements of cash flows (unaudited)- nine months ended September 30, 1998 and 1997............... 14 Notes to consolidated financial statements (unaudited)........ 15 Item 2. Management's discussion and analysis of financial condition and results of operations.................................... 22 Item 3. Quantitative and qualitative disclosures about market risk..... 38 PART II. OTHER INFORMATION Item 1. Legal proceedings.............................................. 38 Item 5. Other information.............................................. 38 Item 6. Exhibits and reports on Form 8-K............................... 40 Signatures.................................................................. 41
i Hawaiian Electric Industries, Inc. and subsidiaries Hawaiian Electric Company, Inc. and subsidiaries Form 10-Q--Quarter ended September 30, 1998 GLOSSARY OF TERMS
TERMS DEFINITIONS - ----- ----------- AFUDC Allowance for funds used during construction ASB American Savings Bank, F.S.B., a wholly owned subsidiary of HEI Diversified, Inc. and parent company of American Savings Investment Services Corp., ASB Service Corporation, AdCommunications, Inc., American Savings Mortgage Co., Inc. and ASB Realty Corporation (incorporated on March 27, 1998) ASBR ASB Realty Corporation BIF Bank Insurance Fund BLNR Board of Land and Natural Resources of the State of Hawaii BOA Bank of America, FSB CDUP Conservation District Use Permit COMPANY Hawaiian Electric Industries, Inc. and its direct and indirect subsidiaries, including, without limitation, Hawaiian Electric Company, Inc., Maui Electric Company, Limited, Hawaii Electric Light Company, Inc., HECO Capital Trust I, HECO Capital Trust II (formed on October 15, 1998), HEI Investment Corp., Malama Pacific Corp. and its subsidiaries, Hawaiian Tug & Barge Corp., Young Brothers, Limited, HEI Diversified, Inc., American Savings Bank, F.S.B. and its subsidiaries, HEIDI Real Estate Corp., Pacific Energy Conservation Services, Inc., HEI Power Corp. and its subsidiaries, HEI District Cooling, Inc. (incorporated on August 17, 1998), ProVision Technologies, Inc. (incorporated on October 13, 1998), Hycap Management, Inc., Hawaiian Electric Industries Capital Trust I, Hawaiian Electric Industries Capital Trust II and Hawaiian Electric Industries Capital Trust III CONSUMER Division of Consumer Advocacy, Department of Commerce and Consumer Affairs of the ADVOCATE State of Hawaii D&O Decision and order DLNR Department of Land and Natural Resources of the State of Hawaii DOH Department of Health of the State of Hawaii ENCOGEN Encogen Hawaii, L.P., an affiliate of Enserch Development Corporation ENSERCH Enserch Development Corporation EPA Environmental Protection Agency - federal FASB Financial Accounting Standards Board FDIC Federal Deposit Insurance Corporation
ii GLOSSARY OF TERMS, CONTINUED
TERMS DEFINITIONS - ----- ----------- FEDERAL U.S. Government FHLB Federal Home Loan Bank FICO Financing Corporation FUNDS ACT Deposit Insurance Funds Act of 1996 GAAP Generally accepted accounting principles GPA Guam Power Authority HCPC Hilo Coast Power Company HECO Hawaiian Electric Company, Inc., a wholly owned electric utility subsidiary of Hawaiian Electric Industries, Inc. and parent company of Maui Electric Company, Limited, Hawaii Electric Light Company, Inc., HECO Capital Trust I and HECO Capital Trust II HEI Hawaiian Electric Industries, Inc., direct parent company of Hawaiian Electric Company, Inc., HEI Investment Corp., Malama Pacific Corp., Hawaiian Tug & Barge Corp., HEI Diversified, Inc., Pacific Energy Conservation Services, Inc., HEI Power Corp., HEI District Cooling, Inc., ProVision Technologies, Inc., Hycap Management, Inc., Hawaiian Electric Industries Capital Trust I, Hawaiian Electric Industries Capital Trust II and Hawaiian Electric Industries Capital Trust III HEIDI HEI Diversified, Inc., a wholly owned subsidiary of Hawaiian Electric Industries, Inc. and the parent company of American Savings Bank, F.S.B. and HEIDI Real Estate Corp. HEIIC HEI Investment Corp., a wholly owned subsidiary of Hawaiian Electric Industries, Inc. HEIPC HEI Power Corp., a wholly owned subsidiary of Hawaiian Electric Industries, Inc., and the parent company of several subsidiaries HELCO Hawaii Electric Light Company, Inc., a wholly owned electric utility subsidiary of Hawaiian Electric Company, Inc. HIG The Hawaiian Insurance & Guaranty Company, Limited, an insurance company which was placed in state rehabilitation proceedings. HEI Diversified, Inc. was the holder of record of HIG's common stock prior to August 16, 1994 HPG HEI Power Corp. Guam, a wholly owned subsidiary of HEI Power Corp. HTB Hawaiian Tug & Barge Corp., a wholly owned subsidiary of Hawaiian Electric Industries, Inc. and parent company of Young Brothers, Limited IPP Independent power producer
iii GLOSSARY OF TERMS, CONTINUED
TERMS DEFINITIONS - ----- ----------- KCP Kawaihae Cogeneration Partners KWH Kilowatthour MECO Maui Electric Company, Limited, a wholly owned electric utility subsidiary of Hawaiian Electric Company, Inc. MPC Malama Pacific Corp., a wholly owned subsidiary of Hawaiian Electric Industries, Inc. and parent company of several real estate subsidiaries MW Megawatt NOV Notice of Violation OTS Office of Thrift Supervision, Department of Treasury PSD PERMIT Prevention of Significant Deterioration/Covered Source permit PUC Public Utilities Commission of the State of Hawaii REIT Real estate investment trust ROACE Return on average common equity ROR Simple average return on rate base SAIF Savings Association Insurance Fund SEC Securities and Exchange Commission SFAS Statement of Financial Accounting Standards YB Young Brothers, Limited, a wholly owned subsidiary of Hawaiian Tug & Barge Corp.
FORWARD-LOOKING INFORMATION This report and other presentations made by HEI and its subsidiaries contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. Except for historical information contained herein, the matters set forth are forward-looking statements that involve certain risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Potential risks and uncertainties include, but are not limited to, such factors as the effect of international, national and local economic conditions, including the condition of the Hawaii tourist and construction industries and the Hawaii housing market; the effects of weather and natural disasters; product demand and market acceptance risks; increasing competition in the electric utility industry; capacity and supply constraints or difficulties; new technological developments; governmental and regulatory actions, including decisions in rate cases and on permitting issues; the results of financing efforts; the timing and extent of changes in interest rates and foreign currency exchange rates; the convertibility and availability of foreign currency; political and business risks inherent in doing business in a developing country; and the risks associated with the installation of new computer systems and the avoidance of Year 2000 problems. Investors are also referred to other risks and uncertainties discussed in other periodic reports filed by HEI and/or HECO in 1998 with the Securities and Exchange Commission. iv PART I - FINANCIAL INFORMATION - -------------------------------------------------------------------------------- ITEM 1. FINANCIAL STATEMENTS - ----------------------------- Hawaiian Electric Industries, Inc. and subsidiaries CONSOLIDATED BALANCE SHEETS (UNAUDITED)
September 30, December 31, (in thousands) 1998 1997 - ----------------------------------------------------------------------------------------------------------------- ASSETS - ------ Cash and equivalents............................................ $ 275,102 $ 253,910 Accounts receivable and unbilled revenues, net.................. 156,592 158,231 Investment and mortgage-backed securities....................... 2,014,291 1,971,886 Loans receivable, net........................................... 3,125,835 3,035,847 Property, plant and equipment, net of accumulated depreciation and amortization of $1,048,822 and $974,759..... 2,075,760 2,019,518 Regulatory assets............................................... 110,772 104,079 Other........................................................... 241,235 258,907 Goodwill and other intangibles.................................. 117,153 122,492 ---------- ---------- $8,116,740 $7,924,870 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ LIABILITIES Accounts payable................................................ $ 113,734 $ 148,445 Deposit liabilities............................................. 3,832,053 3,916,600 Short-term borrowings........................................... 181,357 284,663 Securities sold under agreements to repurchase.................. 534,812 375,366 Advances from Federal Home Loan Bank............................ 823,081 736,474 Long-term debt.................................................. 920,737 794,621 Deferred income taxes........................................... 189,091 189,955 Contributions in aid of construction............................ 199,427 197,596 Other........................................................... 267,459 232,406 ---------- ---------- 7,061,751 6,876,126 ---------- ---------- HEI- and HECO-obligated preferred securities of trust subsidiaries directly or indirectly holding solely HEI and HEI-guaranteed and HECO and HECO-guaranteed subordinated debentures.................................... 150,000 150,000 Preferred stock of electric utility subsidiaries Subject to mandatory redemption............................. 33,180 35,770 Not subject to mandatory redemption......................... 48,293 48,293 ---------- ---------- 231,473 234,063 ---------- ---------- STOCKHOLDERS' EQUITY Preferred stock, no par value, authorized 10,000 shares; issued: none............................................... - - Common stock, no par value, authorized 100,000 shares; issued and outstanding: 32,010 shares and 31,895 shares............ 659,470 654,819 Retained earnings............................................... 164,046 159,862 ---------- ---------- 823,516 814,681 ---------- ---------- $8,116,740 $7,924,870 ========== ==========
See accompanying notes to consolidated financial statements. 1 Hawaiian Electric Industries, Inc. and subsidiaries CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three months ended Nine months ended September 30, September 30, (in thousands, except per share amounts and ------------------------------ --------------------------------- ratio of earnings to fixed charges) 1998 1997 1998 1997 - ---------------------------------------------------------------------------------------------------------------------------------- REVENUES Electric utility...................................... $259,684 $282,234 $ 762,494 $ 831,314 Savings bank.......................................... 103,229 71,625 306,324 210,211 Other................................................. 14,405 16,595 44,023 43,717 -------- -------- ---------- ---------- 377,318 370,454 1,112,841 1,085,242 -------- -------- ---------- ---------- EXPENSES Electric utility...................................... 208,418 234,089 626,969 704,179 Savings bank.......................................... 89,831 59,778 264,245 173,843 Other................................................. 16,770 15,523 48,753 46,035 -------- -------- ---------- ---------- 315,019 309,390 939,967 924,057 -------- -------- ---------- ---------- OPERATING INCOME (LOSS) Electric utility...................................... 51,266 48,145 135,525 127,135 Savings bank.......................................... 13,398 11,847 42,079 36,368 Other................................................. (2,365) 1,072 (4,730) (2,318) -------- -------- ---------- ---------- 62,299 61,064 172,874 161,185 -------- -------- ---------- ---------- Interest expense--electric utility and other.......... (17,601) (15,277) (53,345) (46,179) Allowance for borrowed funds used during construction................................ 1,826 1,522 5,145 4,658 Preferred stock dividends of electric utility subsidiaries............................... (1,499) (1,563) (4,507) (4,697) Preferred securities distributions of trust subsidiaries................................. (3,097) (3,064) (9,289) (7,503) Allowance for equity funds used during construction....................................... 3,139 2,654 8,781 8,079 -------- -------- ---------- ---------- INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES................................ 45,067 45,336 119,659 115,543 Income taxes.......................................... 17,288 17,895 46,140 47,517 -------- -------- ---------- ---------- INCOME FROM CONTINUING OPERATIONS..................... 27,779 27,441 73,519 68,026 -------- -------- ---------- ---------- DISCONTINUED OPERATIONS, NET OF INCOME TAXES Loss from operations............................... (12,474) (3,303) (13,598) (4,430) Net gain on disposals.............................. 3,781 - 3,781 - -------- -------- ---------- ---------- LOSS FROM DISCONTINUED OPERATIONS..................... (8,693) (3,303) (9,817) (4,430) -------- -------- ---------- ---------- NET INCOME............................................ $ 19,086 $ 24,138 $ 63,702 $ 63,596 ======== ======== ========== ========== BASIC EARNINGS (LOSS) PER COMMON SHARE Continuing operations.............................. $ 0.87 $ 0.87 $ 2.30 $ 2.18 Discontinued operations............................ (0.27) (0.10) (0.31) (0.14) -------- -------- ---------- ---------- $ 0.60 $ 0.77 $ 1.99 $ 2.04 ======== ======== ========== ========== DILUTED EARNINGS (LOSS) PER COMMON SHARE Continuing operations.............................. $ 0.86 $ 0.87 $ 2.29 $ 2.17 Discontinued operations............................ (0.27) (0.11) (0.31) (0.14) -------- -------- ---------- ---------- $ 0.59 $ 0.76 $ 1.98 $ 2.03 ======== ======== ========== ========== Dividends per common share............................ $ 0.62 $ 0.61 $ 1.86 $ 1.83 ======== ======== ========== ========== Weighted average number of common shares outstanding................................. 32,010 31,528 31,992 31,244 Dilutive effect of stock options and dividend equivalents....... 128 99 138 85 -------- -------- ---------- ---------- Adjusted weighted average shares...................... 32,138 31,627 32,130 31,329 ======== ======== ========== ========== Ratio of earnings to fixed charges (SEC method) Excluding interest on ASB deposits................. 1.90 1.94 ========== ========== Including interest on ASB deposits................. 1.49 1.61 ========== ==========
See accompanying notes to consolidated financial statements. 2 Hawaiian Electric Industries, Inc. and subsidiaries CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (UNAUDITED)
Three months ended Nine months ended September 30, September 30, --------------------------------- ------------------------------ (in thousands) 1998 1997 1998 1997 - ----------------------------------------------------------- -------------------------------------------------------------------- RETAINED EARNINGS, BEGINNING OF PERIOD................ $164,807 $151,455 $159,862 $149,907 Net income............................................ 19,086 24,138 63,702 63,596 Common stock dividends................................ (19,847) (19,219) (59,518) (57,129) -------- -------- -------- -------- RETAINED EARNINGS, END OF PERIOD...................... $164,046 $156,374 $164,046 $156,374 ======== ======== ======== ========
See accompanying notes to consolidated financial statements. 3 Hawaiian Electric Industries, Inc. and subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine months ended September 30, ------------------------------ (in thousands) 1998 1997 - --------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Income from continuing operations.................................................... $ 73,519 $ 68,026 Adjustments to reconcile income from continuing operations to net cash provided by operating activities Depreciation and amortization of property, plant and equipment................. 74,588 68,532 Other amortization............................................................. 11,397 10,710 Deferred income taxes and tax credits, net..................................... 2,925 4,197 Allowance for equity funds used during construction............................ (8,781) (8,079) Changes in assets and liabilities Decrease (increase) in accounts receivable and unbilled revenues, net.... 1,639 (1,067) Increase in regulatory assets............................................ (2,914) (5,300) Decrease in accounts payable............................................. (34,711) (7,732) Changes in other assets and liabilities.................................. 38,690 (21,625) --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES............................................ 156,352 107,662 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Loans receivable originated and purchased............................................ (494,683) (229,885) Principal repayments on loans receivable............................................. 358,582 110,210 Proceeds from sale of loans receivable............................................... 4,649 2,906 Held-to-maturity mortgage-backed securities purchased................................ (401,740) (297,170) Principal repayments on held-to-maturity mortgage-backed securities.................. 402,288 194,512 Held-to-maturity investment securities purchased..................................... (200,982) - Principal repayments on held-to-maturity investment securities....................... 159,982 - Capital expenditures................................................................. (124,290) (105,697) Contributions in aid of construction................................................. 6,310 4,402 Proceeds from loans returned to Bank of America, FSB................................. 28,104 - Other................................................................................ 5,947 2,563 --------- --------- NET CASH USED IN INVESTING ACTIVITIES................................................ (255,833) (318,159) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase (decrease) in deposit liabilities....................................... (85,155) 69,956 Net decrease in short-term borrowings with original maturities of three months or less....................................... (106,278) (99,914) Proceeds from securities sold under agreements to repurchase......................... 474,812 958,500 Repurchase of securities sold under agreements to repurchase......................... (316,000) (808,100) Proceeds from advances from Federal Home Loan Bank................................... 661,500 578,500 Principal payments on advances from Federal Home Loan Bank........................... (574,893) (556,000) Proceeds from issuance of long-term debt............................................. 185,394 8,371 Repayment of long-term debt.......................................................... (59,400) (14,900) Proceeds from issuance of HEI- and HECO-obligated preferred securities of trust subsidiaries........................................................................ - 150,000 Redemption of electric utility subsidiaries' preferred stock......................... (2,590) (2,885) Net proceeds from issuance of common stock........................................... 4,553 18,906 Common stock dividends............................................................... (59,518) (46,132) Preferred securities distributions of trust subsidiaries............................. (9,289) (7,503) Other................................................................................ (3,728) (11,347) --------- --------- NET CASH PROVIDED BY FINANCING ACTIVITIES............................................ 109,408 237,452 --------- --------- NET CASH PROVIDED BY DISCONTINUED OPERATIONS......................................... 11,265 - --------- --------- Net increase in cash and equivalents................................................. 21,192 26,955 Cash and equivalents, beginning of period............................................ 253,910 97,113 --------- --------- CASH AND EQUIVALENTS, END OF PERIOD.................................................. $ 275,102 $ 124,068 ========= =========
See accompanying notes to consolidated financial statements. 4 Hawaiian Electric Industries, Inc. and subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 1998 and 1997 (Unaudited) - -------------------------------------------------------------------------------- (1) BASIS OF PRESENTATION - ------------------------- The accompanying unaudited consolidated financial statements have been prepared in conformity with generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Securities and Exchange Commission (SEC) Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the balance sheet and the reported amounts of revenues and expenses for the period. Actual results could differ significantly from those estimates. The accompanying unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto incorporated by reference in HEI's Annual Report on SEC Form 10-K for the year ended December 31, 1997 and the consolidated financial statements and the notes thereto in HEI's Quarterly Reports on SEC Forms 10-Q for the quarters ended March 31 and June 30, 1998. In the opinion of HEI's management, the accompanying unaudited consolidated financial statements contain all material adjustments required by GAAP to present fairly the Company's financial position as of September 30, 1998 and December 31, 1997, the results of its operations for the three months and nine months ended September 30, 1998 and 1997, and its cash flows for the nine months ended September 30, 1998 and 1997. All such adjustments are of a normal recurring nature, unless otherwise disclosed in this Form 10Q or other referenced material. Results of operations for interim periods are not necessarily indicative of results for the full year. Certain reclassifications have been made to prior periods' consolidated financial statements to conform to the 1998 presentation. (2) ELECTRIC UTILITY SUBSIDIARY - -------------------------------- For Hawaiian Electric Company, Inc.'s consolidated financial information, including its commitments and contingencies, see pages 12 through 21. (3) SAVINGS BANK SUBSIDIARY - ---------------------------- SELECTED CONSOLIDATED FINANCIAL INFORMATION American Savings Bank, F.S.B. and subsidiaries Income statement data
Three months ended Nine months ended September 30, September 30, ----------------------------------- ------------------------------ (in thousands) 1998 1997 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------- Interest income..................................... $ 95,385 $ 67,425 $285,437 $198,459 Interest expense.................................... 56,214 40,240 163,265 116,722 -------- -------- -------- -------- NET INTEREST INCOME................................. 39,171 27,185 122,172 81,737 Provision for losses................................ (3,125) (2,068) (9,473) (4,860) Other income........................................ 7,844 4,200 20,887 11,752 Operating, administrative and general expenses...... (30,492) (17,470) (91,507) (52,261) -------- -------- -------- -------- OPERATING INCOME.................................... 13,398 11,847 42,079 36,368 Income taxes........................................ 4,144 4,807 14,413 15,057 -------- -------- -------- -------- INCOME BEFORE PREFERRED STOCK DIVIDENDS............. 9,254 7,040 27,666 21,311 Dividends on preferred stock held by parent......... 1,350 -- 4,050 -- -------- -------- -------- -------- NET INCOME.......................................... $ 7,904 $ 7,040 $ 23,616 $ 21,311 ======== ======== ======== ========
5 American Savings Bank, F.S.B. and subsidiaries Balance sheet data
September 30, December 31, (in thousands) 1998 1997 - ------------------------------------------------------------------------------------------------------------------- ASSETS Cash and equivalents..................................................... $ 264,922 $ 249,607 Held-to-maturity investment securities................................... 150,010 105,596 Held-to-maturity mortgage-backed securities.............................. 1,863,081 1,865,027 Loans receivable, net.................................................... 3,125,835 3,035,847 Other.................................................................... 162,503 169,843 Goodwill and other intangibles........................................... 117,153 122,492 ---------- ---------- $5,683,504 $5,548,412 ========== ========== LIABILITIES AND EQUITY Deposit liabilities...................................................... $3,832,053 $3,916,600 Securities sold under agreements to repurchase........................... 534,812 375,366 Advances from Federal Home Loan Bank..................................... 823,081 736,474 Other.................................................................... 83,716 124,185 ---------- ---------- 5,273,662 5,152,625 Preferred stock held by parent........................................... 75,000 75,000 Common stock equity...................................................... 334,842 320,787 ---------- ---------- $5,683,504 $5,548,412 ========== ==========
ACQUISITION OF MOST OF THE HAWAII OPERATIONS OF BANK OF AMERICA, FSB (BOA) Effective December 6, 1997, ASB acquired certain loans and other assets and assumed certain deposits and other liabilities of the Hawaii operations of BoA pursuant to a Purchase and Assumption Agreement executed by both parties on May 26, 1997, as amended. ASB used the purchase method of accounting to account for the transaction. Accordingly, the accompanying financial statements include the results of operations related to the assets acquired and liabilities assumed from the acquisition date. The purchase price relative to this transaction was $1.8 billion, comprised of $1.7 billion estimated fair value of liabilities assumed and $0.1 billion premium paid on certain transferred deposit liabilities. In conjunction with this acquisition, the estimated fair value of tangible and intangible assets acquired, including cash of $0.8 billion, amounted to $1.8 billion. ASB recorded the excess of the purchase price over the estimated fair value of the identifiable net assets acquired of $71 million as goodwill and is amortizing it over 25 years using the straight-line method. ASB recorded the core deposit premium of approximately $20 million as an intangible asset and is amortizing it annually at the greater of the actual attrition rate of the acquired core deposits or 10% of the original premium amount. DEPOSIT-INSURANCE PREMIUMS AND REGULATORY DEVELOPMENTS The Savings Association Insurance Fund (SAIF) insures the deposit accounts of ASB and other thrifts. The Bank Insurance Fund (BIF) insures the deposit accounts of commercial banks. The Federal Deposit Insurance Corporation (FDIC) administers the SAIF and BIF. In September 1996, President Clinton signed into law the Deposit Insurance Funds Act of 1996 (Funds Act), which required the FDIC to impose a one-time special assessment on SAIF members. In addition, effective January 1, 1997, the Funds Act provided that the assessment base for raising funds to pay interest on obligations issued by the Financing Corporation (FICO) is to be expanded to include the deposits of banks as well as thrifts. The provisions of the Funds Act should enable SAIF institutions to achieve, over time, parity with BIF institutions in the schedules of the premiums to be paid for deposit insurance coverage and to fund FICO interest obligations. 6 In December 1996, the FDIC adopted a risk-based assessment schedule for SAIF institutions, effective January 1, 1997, that was identical to the existing base rate schedule for BIF institutions: zero to 27 cents per $100 of deposits. Added to this base rate schedule through 1999 will be the assessment to fund FICO's interest obligations which was initially set at 6.48 cents per $100 of deposits for SAIF institutions and 1.3 cents per $100 of deposits for BIF institutions (subject to quarterly adjustment). By law, the FICO rate on BIF- assessable deposits must be one-fifth the rate on SAIF-assessable deposits until the insurance funds are merged or until January 1, 2000, whichever occurs first, at which time the FICO interest obligation for both banks and thrifts should thereafter be identical, at an estimated rate of 2.4 cents per $100 of deposits. In December 1997, ASB acquired BIF-assessable deposits as well as SAIF- assessable deposits from BoA. As a "well-capitalized" thrift, ASB's base deposit insurance premium effective for the September 30, 1998 quarterly payment is zero and its assessment for funding FICO interest payments is 5.82 cents per $100 of SAIF-assessable deposits and 1.16 cents per $100 of BIF-assessable deposits, on an annual basis, based on deposits as of June 30, 1998. ASB's assessment for funding FICO interest payments is subject to change quarterly. The Funds Act provides that the SAIF and BIF will be merged into the Deposit Insurance Fund by January 1, 1999, but only if no insured depository institution is a thrift on that date. The Funds Act leaves to subsequent legislation, however, the manner in which thrift charters might be eliminated in favor of a bank or some other form of charter. Certain of the legislative proposals advanced to address this issue, if adopted, could have a material adverse effect on the Company. For example, if thrift charters were eliminated and ASB obtained a bank charter, HEI and its subsidiaries might become subject to the restrictions on the permissible activities of a bank holding company. While certain of the proposals that have been advanced would grandfather the activities of existing savings and loan holding companies such as HEI, management cannot predict whether or in what form any of these proposals might ultimately be adopted or the extent to which the business of HEI or ASB might be affected. (4) HEI- AND HECO-OBLIGATED PREFERRED SECURITIES OF TRUST SUBSIDIARIES DIRECTLY - -------------------------------------------------------------------------------- OR INDIRECTLY HOLDING SOLELY HEI AND HEI-GUARANTEED AND HECO AND ---------------------------------------------------------------- HECO-GUARANTEED SUBORDINATED DEBENTURES --------------------------------------- In February 1997, Hawaiian Electric Industries Capital Trust I, a grantor trust and wholly owned subsidiary of HEI, issued and sold, in an underwritten registered public offering, 4 million of its HEI-obligated 8.36% preferred securities (trust preferred securities), with an aggregate liquidation value of $100 million. The trust preferred securities have no scheduled maturity and are not redeemable at the option of the holders, but may be redeemed by Hawaiian Electric Industries Capital Trust I, in whole or in part, from time to time, after February 4, 2002. In March 1997, HECO Capital Trust I, a grantor trust and wholly owned subsidiary of HECO, issued and sold, in an underwritten registered public offering, 2 million of its HECO-obligated 8.05% Cumulative Quarterly Income Preferred Securities, Series 1997, with an aggregate liquidation value of $50 million. The HECO-obligated Cumulative Quarterly Income Preferred Securities must be redeemed at the maturity of the underlying debt on March 27, 2027, which maturity may be shortened to a date no earlier than March 27, 2002 or extended to a date no later than March 27, 2046, and are not redeemable at the option of the holders, but may be redeemed by HECO Capital Trust I, in whole or in part, from time to time, after March 27, 2002. SUBSEQUENT EVENT In October 1998, HECO, MECO, HELCO and HECO Capital Trust II filed a registration statement on Form S-3 with the SEC related to the contemplated public offering of 2 million of HECO-Obligated Cumulative Quarterly Income Preferred Securities (QUIPS), Series 1998, with an aggregate liquidation preference of $50 million. The public offering may proceed only if it is approved by the PUC. If the proposed financing is approved by the PUC and completed, it is currently contemplated that the proceeds of the offering will be applied primarily to redeem HECO's Series M, Q and R cumulative preferred stock, MECO's Series A, B, D and G cumulative preferred stock and HELCO's Series A, D, E and F cumulative preferred stock. The new issue of $50 million of QUIPS, coupled with the contemplated redemptions of these series of cumulative preferred stock will bring to $100 million the aggregate liquidation preference of QUIPS, and reduce to approximately $34 million the aggregate par value of the remaining cumulative preferred stock, in consolidated HECO's capital structure. This may result in a one notch downgrade of the rating by Moody's Investors Service of the series of cumulative preferred stock that remain outstanding after the contemplated redemptions, as has been the case with the preferred stock of some other companies. 7 (5) CASH FLOWS - --------------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid for interest (net of capitalized amounts) and income taxes was as follows:
Nine months ended September 30, ------------------------------- (in thousands) 1998 1997 - ----------------------------------------------------------------------------------------------------------------- Interest (including interest paid by savings bank, but excluding interest paid on nonrecourse debt on leveraged leases)............................... $200,453 $152,631 ======== ======== Income taxes................................................................. $ 27,325 $ 45,251 ======== ========
SUPPLEMENTAL DISCLOSURES OF NONCASH ACTIVITIES Under the HEI Dividend Reinvestment and Stock Purchase Plan, common stock dividends reinvested by shareholders in HEI common stock in noncash transactions amounted to $11.0 million for the nine months ended September 30, 1997. Beginning in March 1998, HEI acquired for cash its common shares in the open market to satisfy the requirements of the HEI Dividend Reinvestment and Stock Purchase Plan. The allowance for equity funds used during construction, which was charged to construction in progress as part of the cost of electric utility plant, amounted to $8.8 million and $8.1 million for the nine months ended September 30, 1998 and 1997, respectively. (6) ACCOUNTING CHANGES - ----------------------- EARNINGS PER SHARE In February 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share," which requires the presentation of "basic" earnings per share, computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding for the period, and "diluted" earnings per share, which reflects the potential dilution that could occur if options or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. The Company adopted SFAS No. 128 in the fourth quarter of 1997 and has restated all prior period earnings per share data presented. The adoption of SFAS No. 128 did not have a material effect on the Company's previously reported earnings per share information. COMPREHENSIVE INCOME In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income," which establishes standards for the reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. The Company adopted SFAS No. 130 in the first quarter of 1998, but had no material "other" comprehensive income items for the income statement periods presented or accumulated as of the balance sheet dates presented. SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. The Company adopted SFAS No. 131 in the first quarter of 1998. No modification to the Company's reporting segments was required. 8 COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE In March 1998, the AICPA Accounting Standards Executive Committee issued Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," which requires that certain costs, including certain payroll and payroll-related costs, be capitalized and amortized over the estimated useful life of the software. The provisions of SOP 98-1 are effective for fiscal years beginning after December 15, 1998 and earlier application is encouraged. The Company has not determined when it will adopt SOP 98-1. Management currently believes that the adoption of SOP 98-1 will not have a material effect on the Company's financial condition, results of operations or liquidity. COSTS OF START-UP ACTIVITIES In April 1998, the AICPA Accounting Standards Executive Committee issued SOP 98- 5, "Reporting on the Costs of Start-up Activities," which requires that costs of start-up activities, including organization costs, be expensed as incurred. In addition, the provisions of SOP 98-5 require that the unamortized balance of previously capitalized costs associated with start-up activities be charged to earnings in the period of adoption. The provisions of SOP 98-5 are effective for fiscal years beginning after December 15, 1998 and earlier application is encouraged. The Company has not determined when it will adopt SOP 98-5. Management currently believes that the adoption of SOP 98-5 will not have a material effect on the Company's financial condition, results of operations or liquidity. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments and hedging activities and requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The provisions of SFAS No. 133 are effective for all fiscal quarters of fiscal years beginning after June 15, 1999 and earlier application is encouraged. The Company has not determined when it will adopt SFAS No. 133. Management believes, based on the Company's current level of derivative and hedging activities, that the adoption of SFAS No. 133 will not have a material effect on the Company's financial condition, results of operations or liquidity. (7) CONTINGENCIES - ------------------ ENVIRONMENTAL REGULATION In early 1995, the Department of Health of the State of Hawaii (DOH) initially advised HECO, HTB, YB and others that it was conducting an investigation to determine the nature and extent of actual or potential releases of hazardous substances, oil, pollutants or contaminants at or near Honolulu Harbor. The DOH issued letters in December 1995, indicating that it had identified a number of parties, including HECO, HTB and YB, who appear to be potentially responsible for the contamination and/or to operate their facilities upon contaminated land. The DOH met with these identified parties in January 1996 to inform them of its findings and to establish the framework to determine remedial and cleanup requirements. Certain parties identified in the December 1995 DOH letter (including HECO, Chevron Products Company, Shell Oil Products Company, State of Hawaii Department of Transportation Harbors Division and others) formed a Technical Work Group to conduct independent voluntary investigations relative to this issue. Effective January 30, 1998, the Technical Work Group and the DOH entered into a voluntary agreement and scope of work to determine the nature and extent of any contamination, the responsible parties and appropriate remedial actions. The Technical Work Group met in June 1998 with a consultant, Ogden Environmental & Energy Services, to discuss its proposed work plan and schedule, and subsequently met with and informed the DOH of the work plan. The Technical Work Group now anticipates that the Phase I report will be completed by the end of November 1998. Because the process for determining appropriate remedial and cleanup action, if any, is at an early stage, management cannot predict at this time the costs of further site analysis or future remediation and cleanup requirements, nor can it estimate when such costs would be incurred. Certain of the costs incurred may be claimed and covered under insurance policies, but such coverage is not determinable at this time. 9 (8) DISCONTINUED OPERATIONS - ---------------------------- THE HAWAIIAN INSURANCE & GUARANTY COMPANY, LIMITED The Hawaiian Insurance & Guaranty Company, Limited (HIG) and its subsidiaries (collectively, the HIG Group) were property and casualty insurance companies. In December 1992, due to a significant increase in the estimate of policyholder claims from Hurricane Iniki, the HEI Board of Directors concluded it would not contribute additional capital to HIG and the remaining investment in the HIG Group was written off. On December 24, 1992, a formal rehabilitation order vested full control over the HIG Group in the Insurance Commissioner of the State of Hawaii (the Rehabilitator) and her deputies. HEI Diversified, Inc. (HEIDI) was the holder of record of all the common stock of HIG until August 16, 1994. A lawsuit stemming from this situation was settled in 1994, with the Company making a settlement payment of $32 million to the Rehabilitator. HEI and HEIDI sought reimbursement for the settlement, interest and defense costs from three director and officer liability insurance carriers. The primary director and officer liability insurance carrier filed a declaratory relief action in the U.S. District Court for Hawaii seeking resolution of insurance coverage and other policy issues, and HEI and HEIDI filed counterclaims. In early August 1998, the Company settled all claims with the three former insurance carriers relating to the 1994 settlement payment. The Company received $24.5 million ($13.8 million net of estimated expenses and income taxes or $0.43 in basic earnings per share for the quarter and nine months ended September 30, 1998), and recorded the settlement as net gain on disposal of discontinued operations in the third quarter of 1998. MALAMA PACIFIC CORP. On September 14, 1998, the Board of Directors of HEI ratified management's plan to exit the residential real estate development business (Malama Pacific Corp. or MPC) by September 1999. Accordingly, effective September 14, 1998, management commenced a program to actively market for sale all of MPC's real estate assets and investments. These operations are reflected as discontinued operations for all periods presented in the Company's consolidated statements of income. In addition, in the third quarter of 1998, MPC recognized impairment losses amounting to approximately $19.3 million in accordance with the provisions of SFAS No. 121, notwithstanding management's plan to exit the residential real estate development business. Operating activity of the residential real estate development business for the period September 14, 1998 through September 30, 1998 was not significant. Summary financial information for the discontinued operations of MPC is as follows:
Three months ended Nine months ended September 30, September 30, --------------------------------------------------------------- (in thousands) 1998 1997 1998 1997 - -------------------------------------------- ---------------------------------------------------------------- OPERATIONS Revenues.................................... $ 743 $ 817 $ 3,313 $ 5,475 Operating loss (including writedowns)....... $(19,881) $(4,752) $(20,648) $(5,351) Interest expense............................ (538) (652) (1,609) (1,895) Income tax benefits......................... 7,945 2,101 8,659 2,816 -------- ------- -------- ------- LOSS FROM OPERATIONS........................ $(12,474) $(3,303) $(13,598) $(4,430) -------- ------- -------- ------- DISPOSAL Loss, including provision of $5,000 for loss from operations during phase-out period..................................... $(16,343) - $(16,343) - Income tax benefits......................... 6,359 - 6,359 - -------- ------- -------- ------- LOSS ON DISPOSAL............................ $ (9,984) - $ (9,984) - -------- ------- -------- ------- LOSS FROM DISCONTINUED OPERATIONS OF MPC.... $(22,458) $(3,303) $(23,582) $(4,430) ======== ======= ======== ======= IMPACT ON BASIC EARNINGS PER SHARE.......... $(0.70) $(0.10) $(0.74) $(0.14) ======== ======= ======== =======
10 As of September 30, 1998, the remaining net assets of the discontinued residential real estate development operations amounted to $18.9 million (included in "Other" assets) and consisted primarily of real estate assets, receivables and deferred tax assets, reduced by loans and accounts payable. The amounts that MPC will ultimately realize from the sale of the real estate assets could differ materially from the recorded amounts as of September 30, 1998. Prior to September 14, 1998, interest expense (in the above table) consisted of actual interest accrued on MPC's borrowings from banks and other third parties, and allocated interest calculated at HEI's existing commercial paper rates applied to intercompany borrowing amounts. Interest costs included in the determination of the loss on disposal of MPC amounted to $2 million and consisted of interest expected to be incurred on MPC's borrowings from banks and other third parties ($1 million) and allocated interest ($1 million). Allocated interest was calculated at HEI's weighted average cost of debt as of September 30, 1998, applied to 80% of MPC's expected remaining assets, net of bank and other third party debt, over the expected disposal period. 11 Hawaiian Electric Company, Inc. and subsidiaries CONSOLIDATED BALANCE SHEETS (UNAUDITED)
September 30, December 31, (in thousands, except par value) 1998 1997 - ----------------------------------------------------------------------------------------------------------------------- ASSETS Utility plant, at cost Land.................................................................. $ 32,237 $ 32,222 Plant and equipment................................................... 2,681,983 2,559,655 Less accumulated depreciation......................................... (968,711) (904,781) Plant acquisition adjustment, net..................................... 523 562 Construction in progress.............................................. 187,145 205,447 ----------- ---------- NET UTILITY PLANT............................................... 1,933,177 1,893,105 ----------- ---------- Current assets Cash and equivalents.................................................. 5,496 1,676 Customer accounts receivable, net..................................... 67,320 69,378 Accrued unbilled revenues, net........................................ 44,789 45,980 Other accounts receivable, net........................................ 4,281 4,195 Fuel oil stock, at average cost....................................... 15,087 25,058 Materials and supplies, at average cost............................... 16,977 18,975 Prepayments and other................................................. 2,822 3,335 ----------- ---------- TOTAL CURRENT ASSETS............................................ 156,772 168,597 ----------- ---------- Other assets Regulatory assets..................................................... 108,618 101,809 Other................................................................. 48,132 48,803 ----------- ---------- TOTAL OTHER ASSETS.............................................. 156,750 150,612 ----------- ---------- $2,246,699 $2,212,314 =========== ========== CAPITALIZATION AND LIABILITIES Capitalization Common stock, $6 2/3 par value, authorized 50,000 shares; outstanding 12,806 shares........................... $ 85,387 $ 85,387 Premium on capital stock.............................................. 296,364 296,266 Retained earnings..................................................... 406,719 387,582 ----------- ---------- COMMON STOCK EQUITY............................................. 788,470 769,235 Cumulative preferred stock Not subject to mandatory redemption................................ 48,293 48,293 Subject to mandatory redemption.................................... 31,585 33,175 HECO-obligated mandatorily redeemable trust preferred securities of subsidiary trust holding solely HECO and HECO-guaranteed debentures......................................................... 50,000 50,000 Long-term debt, net................................................... 613,137 597,621 ----------- ---------- TOTAL CAPITALIZATION............................................ 1,531,485 1,498,324 ----------- ---------- Current liabilities Long-term debt due within one year.................................... 30,000 30,000 Preferred stock sinking fund payments................................. 1,595 2,595 Short-term borrowings - nonaffiliates................................. 95,434 95,181 Short-term borrowings - affiliate..................................... - 400 Accounts payable...................................................... 38,248 49,805 Interest and preferred dividends payable.............................. 18,747 12,225 Taxes accrued......................................................... 62,686 59,952 Other................................................................. 21,023 21,633 ----------- ---------- TOTAL CURRENT LIABILITIES....................................... 267,733 271,791 ----------- ---------- Deferred credits and other liabilities Deferred income taxes................................................. 127,339 125,509 Unamortized tax credits............................................... 51,290 48,675 Other................................................................. 69,425 70,419 ----------- ---------- TOTAL DEFERRED CREDITS AND OTHER LIABILITIES.................... 248,054 244,603 ----------- ---------- Contributions in aid of construction..................................... 199,427 197,596 ----------- ---------- $ 2,246,699 $2,212,314 =========== ==========
See accompanying notes to HECO's consolidated financial statements. 12 Hawaiian Electric Company, Inc. and subsidiaries CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three months ended Nine months ended September 30, September 30, (in thousands, except for ratio of earnings ------------------------------- ------------------------------- to fixed charges) 1998 1997 1998 1997 - ----------------------------------------------------------------------------------------------------------------------------------- OPERATING REVENUES......................................... $257,368 $280,193 $755,615 $824,762 -------- -------- -------- -------- OPERATING EXPENSES Fuel oil................................................... 48,554 61,733 149,734 196,065 Purchased power............................................ 69,148 75,238 204,822 218,462 Other operation............................................ 34,286 37,774 104,251 111,221 Maintenance................................................ 10,508 12,273 31,738 38,687 Depreciation and amortization.............................. 21,448 20,504 64,336 61,507 Taxes, other than income taxes............................. 24,263 26,360 71,609 77,815 Income taxes............................................... 16,693 15,071 42,253 38,848 -------- -------- -------- -------- 224,900 248,953 668,743 742,605 -------- -------- -------- -------- OPERATING INCOME........................................... 32,468 31,240 86,872 82,157 -------- -------- -------- -------- OTHER INCOME Allowance for equity funds used during construction..................................... 3,139 2,654 8,781 8,079 Other, net................................................. 2,117 1,894 6,439 6,154 -------- -------- -------- -------- 5,256 4,548 15,220 14,233 -------- -------- -------- -------- INCOME BEFORE INTEREST AND OTHER CHARGES................... 37,724 35,788 102,092 96,390 -------- -------- -------- -------- INTEREST AND OTHER CHARGES Interest on long-term debt................................. 9,910 9,944 30,602 29,654 Amortization of net bond premium and expense............... 374 328 1,096 976 Other interest charges..................................... 1,785 2,026 5,086 5,921 Allowance for borrowed funds used during construction..................................... (1,826) (1,522) (5,145) (4,658) Preferred stock dividends of subsidiaries.................. 638 651 1,915 1,951 Preferred securities distributions of trust subsidiary........................................ 1,006 974 3,019 2,046 -------- -------- -------- -------- 11,887 12,401 36,573 35,890 -------- -------- -------- -------- INCOME BEFORE PREFERRED STOCK DIVIDENDS OF HECO................................................. 25,837 23,387 65,519 60,500 Preferred stock dividends of HECO.......................... 861 912 2,592 2,746 -------- -------- -------- -------- NET INCOME FOR COMMON STOCK................................ $ 24,976 $ 22,475 $ 62,927 $ 57,754 ======== ======== ======== ======== Ratio of earnings to fixed charges (SEC method)............................................ 3.36 3.24 ======== ========
Hawaiian Electric Company, Inc. and subsidiaries CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (UNAUDITED)
Three months ended Nine months ended September 30, September 30, ---------------------------- ------------------------------ (in thousands) 1998 1997 1998 1997 - ----------------------------------------------------------------------------------------------------------------------------------- RETAINED EARNINGS, BEGINNING OF PERIOD..................... $410,207 $375,114 $387,582 $367,770 Net income for common stock................................ 24,976 22,475 62,927 57,754 Common stock dividends..................................... (28,464) (13,586) (43,790) (41,521) -------- -------- -------- -------- RETAINED EARNINGS, END OF PERIOD........................... $406,719 $384,003 $406,719 $384,003 ======== ======== ======== ========
HEI owns all the common stock of HECO. Therefore, per share data with respect to shares of common stock of HECO are not meaningful. See accompanying notes to HECO's consolidated financial statements. 13 Hawaiian Electric Company, Inc. and subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine months ended September 30, ------------------------------ (in thousands) 1998 1997 - -------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Income before preferred stock dividends of HECO................................... $ 65,519 $ 60,500 Adjustments to reconcile income before preferred stock dividends of HECO to net cash provided by operating activities Depreciation and amortization of property, plant and equipment.............. 64,336 61,507 Other amortization.......................................................... 5,204 8,163 Deferred income taxes....................................................... 1,830 2,599 Tax credits, net............................................................ 3,829 2,213 Allowance for equity funds used during construction......................... (8,781) (8,079) Changes in assets and liabilities Decrease in accounts receivable........................................ 1,972 834 Decrease in accrued unbilled revenues.................................. 1,191 1,010 Decrease in fuel oil stock............................................. 9,971 6,025 Decrease in materials and supplies..................................... 1,998 95 Increase in regulatory assets.......................................... (2,914) (5,300) Decrease in accounts payable........................................... (11,557) (17,817) Changes in other assets and liabilities................................ (495) (14,083) -------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES......................................... 132,103 97,667 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures.............................................................. (98,016) (87,371) Contributions in aid of construction.............................................. 6,310 4,402 Payments on notes receivable...................................................... 1,141 1,920 -------- -------- NET CASH USED IN INVESTING ACTIVITIES............................................. (90,565) (81,049) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Common stock dividends............................................................ (43,790) (41,521) Preferred stock dividends......................................................... (2,592) (2,746) Preferred securities distributions of trust subsidiary............................ (3,019) (2,046) Proceeds from issuance of HECO-obligated mandatorily redeemable preferred securities of trust subsidiary................................................... 50,000 Proceeds from issuance of long-term debt.......................................... 72,894 8,371 Repayment of long-term debt....................................................... (57,500) (13,000) Redemption of preferred stock..................................................... (2,590) (2,885) Net decrease in short-term borrowings from nonaffiliates and affiliate with original maturities of three months or less..................... (147) (9,413) Other............................................................................. (974) (2,273) -------- -------- NET CASH USED IN FINANCING ACTIVITIES............................................. (37,718) (15,513) -------- -------- Net increase in cash and equivalents.............................................. 3,820 1,105 Cash and equivalents, beginning of period......................................... 1,676 823 -------- -------- CASH AND EQUIVALENTS, END OF PERIOD............................................... $ 5,496 $ 1,928 ======== ========
See accompanying notes to HECO's consolidated financial statements. 14 Hawaiian Electric Company, Inc. and subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 1998 and 1997 (Unaudited) - -------------------------------------------------------------------------------- (1) BASIS OF PRESENTATION - -------------------------- The accompanying unaudited consolidated financial statements have been prepared in conformity with GAAP for interim financial information and with the instructions to SEC Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the balance sheet and the reported amounts of revenues and expenses for the period. Actual results could differ significantly from those estimates. The accompanying unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto incorporated by reference in HECO's Annual Report on SEC Form 10-K for the year ended December 31, 1997 and the consolidated financial statements and the notes thereto in HECO's Quarterly Reports on SEC Forms 10-Q for the quarters ended March 31 and June 30, 1998. In the opinion of HECO's management, the accompanying unaudited consolidated financial statements contain all material adjustments required by GAAP to present fairly the financial position of HECO and its subsidiaries as of September 30, 1998 and December 31, 1997, the results of their operations for the three months and nine months ended September 30, 1998 and 1997, and their cash flows for the nine months ended September 30, 1998 and 1997. All such adjustments are of a normal recurring nature, unless otherwise disclosed in this Form 10-Q or other referenced material. Results of operations for interim periods are not necessarily indicative of results for the full year. (2) HECO-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF TRUST - ------------------------------------------------------------------------ SUBSIDIARY HOLDING SOLELY HECO AND HECO-GUARANTEED SUBORDINATED DEBENTURES -------------------------------------------------------------------------- In March 1997, HECO Capital Trust I (Trust), a grantor trust and a wholly owned subsidiary of HECO, sold (i) in a registered public offering, 2 million of its HECO-Obligated 8.05% Cumulative Quarterly Income Preferred Securities, Series 1997 (trust preferred securities) with an aggregate liquidation preference of $50 million and (ii) to HECO, common securities with a liquidation preference of approximately $1.55 million. Proceeds from the sale of the trust preferred securities and the common securities were used by the Trust to purchase 8.05% Junior Subordinated Deferrable Interest Debentures, Series 1997 (junior deferrable debentures) issued by HECO in the principal amount of $31.55 million and issued by each of MECO and HELCO in the principal amounts of $10 million. The junior deferrable debentures, which mature on March 27, 2027, together with the subsidiary guarantees (pursuant to which the obligations of MECO and HELCO under their respective debentures are fully and unconditionally guaranteed by HECO), are the sole assets of the Trust. Contractual arrangements entered into by HECO in connection with the issuance of the trust preferred securities, considered together, constitute a full and unconditional guarantee by HECO, on a subordinated basis, of the periodic distributions due on the trust preferred securities and of amounts due upon the redemption thereof or upon liquidation of the Trust. The junior deferrable debentures and the common securities of the Trust have been eliminated in HECO's consolidated balance sheets as of September 30, 1998 and December 31, 1997. The trust preferred securities are subject to mandatory redemption upon redemption of the junior deferrable debentures. The junior deferrable debentures are redeemable only (i) at the option of HECO, MECO and HELCO, respectively, in whole or in part, on or after March 27, 2002 or (ii) at the option of HECO, in whole, upon the occurrence of a "Special Event" (relating to certain changes in laws or regulations). SUBSEQUENT EVENT In October 1998, HECO, MECO, HELCO and HECO Capital Trust II filed a registration statement on Form S-3 with the SEC related to the contemplated public offering of 2 million of HECO-Obligated Cumulative Quarterly Income Preferred Securities (QUIPS), Series 1998, with an aggregate liquidation preference of $50 million. The public offering may proceed only if it is approved by the PUC. If the proposed financing is approved by the PUC and completed, it is currently contemplated that the 15 proceeds of the offering will be applied primarily to redeem HECO's Series M, Q and R cumulative preferred stock, MECO's Series A, B, D and G cumulative preferred stock and HELCO's Series A, D, E and F cumulative preferred stock. The new issue of $50 million of QUIPS, coupled with the contemplated redemptions of these series of cumulative preferred stock, will bring to $100 million the aggregate liquidation preference of QUIPS, and reduce to approximately $34 million the aggregate par value of the remaining cumulative preferred stock, in consolidated HECO's capital structure. This may result in a one notch downgrade of the rating by Moody's Investors Service of the series of cumulative preferred stock that remain outstanding after the contemplated redemptions, as has been the case with the preferred stock of some other companies. (3) CASH FLOWS - --------------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid for interest (net of capitalized amounts) and income taxes was as follows:
Nine months ended September 30, --------------------------------------------- (in thousands) 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------- Interest.......................................................................... $26,249 $26,130 ======= ======= Income taxes...................................................................... $22,277 $33,912 ======= =======
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES The allowance for equity funds used during construction, which was charged to construction in progress as part of the cost of electric utility plant, amounted to $8.8 million and $8.1 million for the nine months ended September 30, 1998 and 1997, respectively. (4) COMMITMENTS AND CONTINGENCIES - ---------------------------------- HELCO POWER SITUATION BACKGROUND. In 1991, HELCO identified the need, beginning in 1994, for - ---------- additional generation to provide for forecast load growth while maintaining a satisfactory generation reserve margin, to address uncertainties about future deliveries of power from existing firm power producers and to permit the retirement of older generating units. Accordingly, HELCO proceeded with plans to install at its Keahole power plant site two 20-megawatt (MW) combustion turbines (CT-4 and CT-5), followed by an 18-MW heat steam recovery generator (ST-7), at which time these units would be converted to a 56-MW (net) combined-cycle unit. In January 1994, the Public Utilities Commission of the State of Hawaii (PUC) approved expenditures for CT-4, which HELCO had planned to install in late 1994. The timing of the installation of HELCO's phased combined-cycle unit at the Keahole power plant site has been revised due to delays in (a) obtaining approval from the Hawaii Board of Land and Natural Resources (BLNR) of a Conservation District Use Permit (CDUP) amendment and (b) obtaining from the Department of Health of the State of Hawaii (DOH) and the U.S. Environmental Protection Agency (EPA) a Prevention of Significant Deterioration/Covered Source permit (PSD permit) for the Keahole power plant site. Subject to satisfactory resolution of the CDUP amendment and PSD permit matters, HELCO's current plan contemplates that CT-4 and CT-5 will be the next generating units added to its system. Current plans are for ST-7 to be deferred to approximately 2006 unless the Encogen Hawaii, L.P. facility (described below) is not placed in service as planned. CDUP AMENDMENT. On July 10, 1997, the Third Circuit Court of the State of Hawaii - --------------- issued its Amended Findings of Fact, Conclusions of Law, Decision and Order on HELCO's appeal of an order of the BLNR, along with other civil cases relating to HELCO's application for a CDUP amendment. This decision allows HELCO to use its Keahole property as requested in its application. An amended order to the same effect was issued on August 18, 1997. Final judgments have been entered as to all of the consolidated cases. Appeals with respect to the final judgments for certain of the cases have been filed with the Hawaii Supreme Court. Motions filed with the Third Circuit Court to stay the effectiveness of the judgments pending resolution of the appeals were denied in April and July 1998 (in response to a motion for reconsideration). Nonhearing motions for stay of final judgment pending resolution of the appeals were denied by the Hawaii Supreme Court in August 1998. Management believes that HELCO will ultimately prevail on appeal and that the final judgments of the Third Circuit Court will be upheld. 16 PSD PERMIT. In November 1995, the EPA declined to sign HELCO's PSD permit for - ---------- the combined-cycle unit. In October 1997, the EPA approved a revised draft permit and the DOH issued a final PSD permit. Nine appeals of the issuance of the permit have been filed with the Environmental Appeals Board of the EPA. All briefing in the case has been completed. Based on the proceedings to date, management believes that HELCO will ultimately prevail on appeal. DECLARATORY JUDGMENT ACTIONS. In February 1997, the Keahole Defense Coalition - ---------------------------- and three individuals filed a lawsuit in the Third Circuit Court of the State of Hawaii against HELCO, the director of the DOH, and the BLNR, seeking declaratory rulings that, with regard to the Keahole project, one or more of the defendants had violated, or could not allow the plant to operate without violating, the State Clean Air Act, the State Noise Pollution Act, conditions of HELCO's conditional use permit, covenants of HELCO's land patent and Hawaii administrative rules regarding standard conditions applicable to land permits. Discovery is ongoing and the parties are seeking to set the case for trial in 1999. In March 1998, an individual filed a complaint for declaratory judgment against HELCO, the BLNR and the Department of Land and Natural Resources of the State of Hawaii (DLNR). The complaint alleges a violation of plaintiff's constitutional due process rights because the land use conditions (if any) which apply to HELCO's use of the Keahole site were determined administratively by the DLNR (through a letter issued to HELCO in January 1998) rather than being decided by the BLNR in a contested case. Also filed with the complaint was a motion to stay enforcement of the DLNR letter, which motion was denied in April 1998. In May 1998, Waimana Enterprises, whose subsidiary is a partner in Kawaihae Cogeneration Partners (KCP), filed a lawsuit in the Third Circuit Court of the State of Hawaii, asking for a declaration that the January 1998 DLNR letter is void and seeking an injunction to prevent HELCO from further construction until the Court or the BLNR, at a public hearing, determines what conditions and limitations apply and whether HELCO is in compliance with them. The two 1998 cases have been consolidated before the Third Circuit Court of the State of Hawaii. HELCO intends to vigorously defend against the claims raised in these 1997 and 1998 cases and, based on the status of the cases to date, management believes the allegations are without merit. IPP COMPLAINTS. Two independent power producers (IPPs), KCP and Enserch - -------------- Development Corporation (Enserch), filed separate complaints against HELCO with the PUC in 1993 and 1994, respectively, alleging that they are entitled to power purchase contracts to provide HELCO with additional capacity, which they claimed would be a substitute for HELCO's planned 56-MW combined-cycle unit at Keahole. Under HELCO's current estimate of generating capacity requirements, there is a near-term need for capacity in addition to the capacity which might be provided by either of the proposed IPP units. In September 1995, the PUC allowed HELCO to continue to pursue construction of and commit expenditures for the second combustion turbine (CT-5) and the steam recovery generator (ST-7) for its planned combined-cycle unit, stating in its order that "no part of the project may be included in HELCO's rate base unless and until the project is in fact installed, and is used and useful for utility purposes." The PUC also ordered HELCO to continue negotiating with the IPPs and directed that the facility to be built (i.e., either HELCO's or one of the IPP's) should be the one that can be most expeditiously put into service at "allowable cost." The status of the IPPs PUC complaints, and of a complaint filed by Hilo Coast Power Company (HCPC) in April 1997, is as follows: Enserch complaint. In January 1998, HELCO filed with the PUC an application ----------------- for approval of a power purchase agreement for a 60-MW facility and an interconnection agreement with Encogen, an Enserch affiliate, dated October 22, 1997. The agreements were entered into following a settlement agreement between Enserch and HELCO and are subject to PUC approval. The parties to the proceeding include HELCO, Encogen and the Consumer Advocate. The Consumer Advocate submitted information requests to HELCO, and HELCO submitted responses. Motions to intervene filed by KCP, HCPC and one other IPP were denied by the PUC. KCP filed an appeal with the First Circuit Court, challenging the denial of its intervention. KCP's appeal is scheduled for oral argument on November 20, 1998. No schedule has yet been established for the PUC proceeding. 17 KCP complaint. In January 1996, the PUC ordered HELCO to continue in good ------------- faith to negotiate a power purchase agreement with KCP. In May 1997, KCP filed a motion for unspecified "sanctions" against HELCO for allegedly failing to negotiate in good faith. In June 1997, KCP filed a motion asking the PUC to designate KCP's facility as the next generating unit on the HELCO system and to determine the "allowable cost" which would be payable by HELCO to KCP. HELCO filed memoranda in opposition to KCP's motions. An evidentiary hearing was held in August 1997. KCP filed two motions, which HELCO also opposed, to supplement the record. The PUC issued an Order in June 1998 which denied all of KCP's pending motions; provided rulings and/or guidance on certain avoided cost and contract issues; directed HELCO to prepare an updated avoided cost calculation, which includes the Encogen agreement; and directed HELCO and KCP to resume contract negotiations. HELCO resumed negotiations with KCP in compliance with the Order and filed a motion for partial reconsideration with respect to one avoided cost issue. The PUC granted HELCO's motion and modified its order in July 1998. HCPC complaint. In April 1997, HCPC filed a complaint against HELCO with -------------- the PUC, requesting an immediate hearing on HCPC's offer for a new 20-year power purchase contract for its existing facility, which is proposed to be expanded from 22 MW to 32 MW. HCPC's existing power purchase agreement is scheduled to terminate at the end of 1999. The PUC converted the HCPC complaint into a purchased power contract negotiation proceeding. HCPC submitted a new proposal in the proceeding in February 1998. An evidentiary hearing limited to certain avoided cost issues was held in April 1998 and post-hearing briefs on these issues have been submitted. Action by the PUC is pending. Management cannot determine at this time whether the PUC will approve the Encogen power purchase agreement or whether the negotiations with KCP and HCPC and related PUC proceedings will result in the execution and/or PUC approval of a power purchase agreement or impact management's plans with regard to installation of HELCO's combined-cycle unit at the Keahole power plant site. KCP'S FERC PETITION. On July 29, 1998, KCP tendered for filing with the Federal - -------------------- Energy Regulatory Commission (FERC) a Petition for Enforcement under section 210(h) of PURPA, or in the alternative, a Declaratory Order. KCP alleged that the PUC and HECO have taken actions that violate PURPA, thereby allowing HELCO to begin construction of its own facility and preventing KCP from building its qualifying facility. KCP requested that FERC initiate enforcement proceedings or, in the alternative, issue an order declaring that the PUC's actions violate FERC's rules under PURPA and are therefore preempted under the Federal Power Act. In September 1998, FERC denied KCP's petition. BLNR PETITION. On August 5, 1998, the Keahole Defense Coalition filed with the - -------------- BLNR a Petition for Declaratory Ruling under Section 91-8, Hawaii Revised Statutes. The petition alleges that all conditions in Hawaii Administrative Rules 13-2-21 apply to HELCO's default entitlement to use its Keahole site, that the letter issued to HELCO by the DLNR in January 1998 was erroneous because it failed to incorporate all conditions applicable to the existing permits, and that the DOH issued three separate Notices of Violation (NOVs) to HELCO in 1992 and 1998 for violation of clean air rules, which NOVs constitute violations under the existing permits and render such permits null and void. The petition requests that the BLNR commence a contested case on the petition; that the BLNR determine that HELCO has violated the terms of its existing conditional use permits, causing such permits to be null and void; and that the BLNR determine that HELCO has violated the conditions applicable to its default entitlement, such that HELCO should be enjoined from using the Keahole property under such default entitlement. The BLNR requested that each of the parties submit statements of position on the issues and HELCO filed its statement in October 1998. COMPLAINT AND MOTION FOR TEMPORARY RESTRAINING ORDER. On August 5, 1998, the - ----------------------------------------------------- Keahole Defense Coalition filed in the Third Circuit Court of the State of Hawaii a Complaint and Motion for Temporary Restraining Order and Preliminary Mandatory Injunction against HELCO and the Chief Engineer, Department of Public Works, County of Hawaii, and on August 6, 1998, filed an amended complaint. The complaint and amended complaint do not identify a cause of action, but allege that the City Engineer issued eight building permits to HELCO for the expansion of the Keahole Generating Station without requiring HELCO to obtain a final Covered Source Permit as a precondition to construction on the belief that the DOH and the EPA had authorized certain construction activities. The complaints call 18 for the suspension and revocation of the eight building permits and an injunction to prevent further construction by HELCO. The motion calls for the Court to mandate that the Chief Engineer suspend or revoke certain building permits for structures, improvements and facilities which are directly or solely associated with or which are of a permanent nature aimed at completing CT-4, CT- 5 and ST-7 and enjoin HELCO from construction at Keahole while the permits are suspended or revoked. The Court issued a temporary restraining order in September 1998. However, HELCO obtained eight new building permits and the old permits were voided. A hearing on HELCO's motion to dismiss the case is scheduled for November 9, 1998. DOH NOTICE OF VIOLATION. In July 1998, the DOH issued a Notice of Violation - ----------------------- (NOV) to HELCO for items allegedly constituting unauthorized construction activity at the Keahole Generating Station prior to receipt of an effective PSD air permit for CT-4 and CT-5. The NOV required HELCO to immediately halt construction activities on pipe rack foundations, a retaining wall and an oil/water separator, and imposed a fine of $48,800. HELCO complied with the stop work order on the designated items and paid the fine. EPA NOTICE OF VIOLATION. In September 1998, the EPA issued a NOV to HELCO - ----------------------- stating that HELCO violated the Hawaii State Implementation Plan by commencing construction activities at the Keahole generating station without first obtaining a final air permit. By law, 30 days after the NOV, the EPA may issue an Order requiring compliance with applicable laws, assessing penalties and/or commencing a civil action seeking an injunction; however, no Order has yet been issued. HELCO has put the EPA on notice that certain construction activities not affected by the NOV are continuing, but has halted work on other construction activities at Keahole until otherwise instructed by the EPA or until the final air permit is received. COSTS INCURRED. As of September 30, 1998, HELCO's costs incurred in its efforts - -------------- to put into service its Keahole combined-cycle unit amounted to $69.2 million, including approximately $28.7 million for equipment and material purchases, approximately $19.7 million for planning, engineering, permitting, site development and other costs and approximately $20.8 million as an allowance for funds used during construction. CONTINGENCY PLANNING. In June 1995, HELCO filed with the PUC its generation - -------------------- resource contingency plan detailing alternatives and mitigation measures to address the further delays that subsequently occurred in obtaining the permits necessary to construct its combined-cycle unit. Actions under the plan have helped HELCO maintain its reserve margin and reduce the risk of near-term capacity shortages. In January 1996, the PUC opened a proceeding to evaluate HELCO's contingency resource plan and HELCO's efforts to insure system reliability. HELCO has filed reports with the PUC from time to time updating the contingency plan and the status of the implementation of the plan. ENVIRONMENTAL REGULATION See discussion of the DOH NOV and the EPA NOV issued to HELCO above and note (7), "Contingencies," in HEI's "Notes to consolidated financial statements." PUC SHOW CAUSE ORDER FOR HECO In March 1997, the PUC issued a show cause order to HECO requesting information to assist the PUC in determining if it should reduce HECO's rates and require HECO to refund any excess earnings to its ratepayers. The PUC noted that for 1996 HECO recorded a return on average common equity (ROACE) of 11.93% and a simple average rate of return on rate base (ROR) of 9.70%, which exceeded the 11.40% ROACE and 9.16% ROR determined to be reasonable by the PUC in HECO's last rate case. HECO filed a motion to close the proceeding in March 1998, based on the fact that the actual returns for 1997--a 10.26% ROACE and a 8.75% ROR--were below the returns the PUC found to be fair and reasonable in the last rate proceeding. The Consumer Advocate has filed with the PUC a statement that it does not oppose HECO's request to close the proceedings. Management cannot predict what future PUC action may be taken in this proceeding. 19 (5) ACCOUNTING CHANGES - ----------------------- COMPREHENSIVE INCOME In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income," which establishes standards for the reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. Consolidated HECO adopted SFAS No. 130 in the first quarter of 1998, but had no material "other" comprehensive income items for the income statement periods presented or accumulated as of the balance sheet dates presented. SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. Consolidated HECO adopted SFAS No. 131 in the first quarter of 1998. No modification to consolidated HECO's reporting segment was required. COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE In March 1998, the AICPA Accounting Standards Executive Committee issued SOP 98- 1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," which requires that certain costs, including certain payroll and payroll-related costs, be capitalized and amortized over the estimated useful life of the software. The provisions of SOP 98-1 are effective for fiscal years beginning after December 15, 1998 and earlier application is encouraged. HECO and its subsidiaries have not determined when they will adopt SOP 98-1. Management currently believes that the adoption of SOP 98-1 will not have a material effect on consolidated HECO's financial condition, results of operations or liquidity. COSTS OF START-UP ACTIVITIES In April 1998, the AICPA Accounting Standards Executive Committee issued SOP 98- 5, "Reporting on the Costs of Start-up Activities," which requires that costs of start-up activities, including organization costs, be expensed as incurred. In addition, the provisions of SOP 98-5 require that the unamortized balance of previously capitalized costs associated with start-up activities be charged to earnings in the period of adoption. The provisions of SOP 98-5 are effective for fiscal years beginning after December 15, 1998 and earlier application is encouraged. HECO and its subsidiaries have not determined when they will adopt SOP 98-5. Management currently believes that the adoption of SOP 98-5 will not have a material effect on consolidated HECO's financial condition, results of operations or liquidity. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments and hedging activities and requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The provisions of SFAS No. 133 are effective for all fiscal quarters of fiscal years beginning after June 15, 1999 and earlier application is encouraged. HECO and its subsidiaries have not determined when they will adopt SFAS No. 133. Management believes, based on consolidated HECO's current level of derivative and hedging activities, that the adoption of SFAS No. 133 will not have a material effect on consolidated HECO's financial condition, results of operations or liquidity. (6) SUMMARIZED FINANCIAL INFORMATION - ------------------------------------- Summarized financial information for HECO's subsidiaries, HELCO and MECO, is as follows: 20 BALANCE SHEET DATA
HELCO MECO ------------------------------------- ---------------------------------- September 30, December 31, September 30, December 31, (in thousands) 1998 1997 1998 1997 - -------------------------------------------------------------------------------------------------------------------------- Current assets................................. $ 26,369 $ 28,631 $ 28,063 $ 31,994 Noncurrent assets.............................. 417,764 403,981 383,459 374,766 -------- -------- -------- -------- $444,133 $432,612 $411,522 $406,760 ======== ======== ======== ======== Common stock equity............................ $147,909 $144,761 $153,568 $150,129 Cumulative preferred stock Not subject to mandatory redemption........ 10,000 10,000 8,000 8,000 Subject to mandatory redemption............ 7,000 7,000 5,385 5,575 Current liabilities............................ 59,810 63,500 22,916 24,454 Noncurrent liabilities......................... 219,414 207,351 221,653 218,602 -------- -------- -------- -------- $444,133 $432,612 $411,522 $406,760 ======== ======== ======== ========
INCOME STATEMENT DATA
HELCO MECO -------------------------------------------------- -------------------------------------------------- Three months Nine months Three months Nine months ended ended ended ended September 30, September 30, September 30, September 30, ----------------------- ------------------------ ------------------------ ----------------------- (in thousands) 1998 1997 1998 1997 1998 1997 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------------ Operating revenues.......... $39,159 $40,674 $115,536 $120,037 $35,108 $39,133 $103,353 $115,393 Operating income............ 5,153 5,267 14,523 13,106 5,207 5,150 14,570 13,288 Net income for common stock...... 4,498 4,315 12,331 10,833 4,196 3,980 11,378 9,828
HECO has not presented separate financial statements and other disclosures concerning MECO and HELCO because management has determined that such information is not material to holders of the junior deferrable debentures issued by MECO and HELCO, respectively, because the debentures have been fully and unconditionally guaranteed by HECO. (7) RECONCILIATION OF ELECTRIC UTILITY OPERATING INCOME PER HEI AND HECO - -------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF INCOME ---------------------------------
Three months ended Nine months ended September 30, September 30, --------------------------- --------------------------- (in thousands) 1998 1997 1998 1997 - ----------------------------------------------------------------------------------------------------------------------------- Operating income from regulated and nonregulated activities before income taxes (per HEI consolidated statements of income).. $ 51,266 $ 48,145 $135,525 $127,135 Deduct: Income taxes on regulated activities............................. (16,693) (15,071) (42,253) (38,848) Revenues from nonregulated activities............................ (2,316) (2,041) (6,879) (6,552) Add: Expenses from nonregulated activities............................ 211 207 479 422 -------- -------- -------- -------- Operating income from regulated activities after income taxes (per HECO consolidated statements of income)..................... $ 32,468 $ 31,240 $ 86,872 $ 82,157 ======== ======== ======== ========
21 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS - -------------------------------------------------------------------------------- OF OPERATIONS ------------- The following discussion should be read in conjunction with the consolidated financial statements of HEI and HECO and accompanying notes. RESULTS OF OPERATIONS HEI CONSOLIDATED - ----------------
Three months ended September 30, (in thousands, except -------------------- % Primary reason(s) for per share amounts) 1998 1997 change significant change* - --------------------------------------------------------------------------------------------------------------------- Revenues........................ $377,318 $370,454 2 Increase for the savings bank segment, partly offset by decreases for the electric utility and "other" segments Operating income................ 62,299 61,064 2 Increases for the electric utility and savings bank segments, partly offset by a decrease for the "other" segment Net income (loss) Continuing operations........ $ 27,779 $ 27,441 1 Higher operating income and AFUDC and lower income taxes (impact of the formation of ASB Realty Corporation), partly offset by higher interest expense primarily due to higher average borrowings partly used to finance the infusion of capital into the savings bank for the acquisition of most of BoA's Hawaii operations Discontinued operations...... (8,693) (3,303) NM Discontinued operations of real estate subsidiary, partly offset by a settlement received from director and officer liability insurance carriers ----------------------- $ 19,086 $ 24,138 (21) ======================= Basic earnings (loss) per common share Continuing operations......... $ 0.87 $ 0.87 -- See explanation for "net income (loss)-continuing operations," partly offset by an increase in shares outstanding Discontinued operations...... (0.27) (0.10) NM See explanation for "net income (loss)-discontinued operations" ----------------------- $ 0.60 $ 0.77 (22) ======================= Weighted average number of common shares outstanding...... 32,010 31,528 2 Issuances under the Dividend Reinvestment and Stock Purchase Plan and other plans***
22
Nine months ended September 30, (in thousands, except -------------------- % Primary reason(s) for per share amounts) 1998 1997 change significant change* - ------------------------------------------------------------------------------------------------------------------------- Revenues........................ $1,112,841 $1,085,242 3 Increase for the savings bank segment, partly offset by a decrease for the electric utility segment Operating income................ 172,874 161,185 7 Increases for the electric utility and savings bank segments, partly offset by a decrease for the "other" segment Net income (loss) Continuing operations........ $ 73,519 $ 68,026 8 Higher operating income and AFUDC and lower income taxes**, partly offset by higher interest expense primarily due to higher average borrowings partly used to finance the infusion of capital into the savings bank for the acquisition of most of BoA's Hawaii operations Discontinued operations...... (9,817) (4,430) NM Discontinued operations of real estate subsidiary, partly offset by a settlement received from director and officer liability insurance carriers --------------------------- $ 63,702 $ 63,596 -- =========================== Basic earnings (loss) per common share Continuing operations......... $ 2.30 $ 2.18 6 See explanation for "net income (loss)-continuing operations," partly offset by an increase in shares outstanding Discontinued operations...... (0.31) (0.14) NM See explanation for "net income (loss)-discontinued operations" --------------------------- $ 1.99 $ 2.04 (2) =========================== Weighted average number of common shares outstanding...... 31,992 31,244 2 Issuances under the Dividend Reinvestment and Stock Purchase Plan and other plans***
NM Not meaningful. * Also see segment discussions which follow. ** Income taxes decreased primarily due to the favorable resolution of HEI's prior years' tax audit issues (with respect to which HEI had established a reserve) and the impact of the formation of ASB Realty Corporation (see savings bank segment discussion which follows). *** In March 1998, HEI began purchasing its common shares in the open market, rather than issuing additional shares, to satisfy the requirements of the HEI Dividend Reinvestment and Stock Purchase Plan and the Hawaiian Electric Industries Retirement Savings Plan. 23 Following is a general discussion of the results of operations by business segment. ELECTRIC UTILITY - ----------------
Three months ended September 30, (in thousands, except per -------------------- % Primary reason(s) for barrel amounts) 1998 1997 change significant change - ------------------------------------------------------------------------------------------------------------- Revenues.................. $259,684 $282,234 (8) Lower fuel prices, the effects of which are passed on to ratepayers ($19 million), and a 2.1% decrease in KWH sales ($3 million) Expenses Fuel oil................. 48,554 61,733 (21) Lower fuel oil prices and better generating unit efficiency, partly offset by higher KWHs generated Purchased power.......... 69,148 75,238 (8) Lower fuel prices and fewer KWHs purchased Other.................... 90,716 97,118 (7) Lower other operation and maintenance expenses and lower revenue taxes Operating income.......... 51,266 48,145 6 Lower revenues more than offset by lower expenses Net income................ 24,976 22,475 11 Higher operating income and higher allowance for funds used during construction Kilowatthour sales (millions).............. 2,323 2,371 (2) Fuel oil price per barrel. $17.79 $22.88 (22)
24
Nine months ended September 30, (in thousands, except per ----------------------- % Primary reason(s) for barrel amounts) 1998 1997 change significant change - ------------------------------------------------------------------------------------------------------------- Revenues.................. $762,494 $831,314 (8) Lower fuel prices, the effects of which are passed on to ratepayers ($60 million), and a 1.5% decrease in KWH sales ($11 million) Expenses Fuel oil................. 149,734 196,065 (24) Lower fuel oil prices, better generating unit efficiency and fewer KWHs generated Purchased power.......... 204,822 218,462 (6) Lower fuel prices and fewer KWHs purchased Other.................... 272,413 289,652 (6) Lower other operation and maintenance expenses and lower revenue taxes Operating income.......... 135,525 127,135 7 Lower revenues more than offset by lower expenses Net income................ 62,927 57,754 9 Higher operating income and higher allowance for funds used during construction, partly offset by higher preferred securities distributions Kilowatthour sales (millions).............. 6,601 6,704 (2) Fuel oil price per barrel. $19.77 $25.54 (23)
Despite lower kilowatthour (KWH) sales, electric utility operating income increased 6% and 7% during the third quarter and first nine months of 1998, respectively, compared to the same periods in 1997, as a result of lower expenses, partly resulting from cost containment efforts. Lower other operation and maintenance expenses (reflecting fewer unit overhauls and lower labor related expenses) contributed to the increases in operating income. Electric utility net income increased 11% and 9% during the third quarter and first nine months of 1998, respectively, compared to the same periods in 1997 as a result of the higher operating income and higher allowance for funds used during construction. The increase in electric utility net income for the nine months ended September 30, 1998 was partly offset by higher preferred securities distributions due to the issuance of the HECO-obligated preferred securities of HECO Capital Trust I in March 1997. KWH sales for the third quarter and nine months of 1998 were down 2.1% and 1.5%, respectively, from the same periods of 1997 primarily due to the slow Hawaii economy and cooler weather. For the first eight months of 1998, visitor arrivals in Hawaii were 1% lower than for the same period in 1997. In addition, cooler temperatures on Oahu resulted in lower residential and commercial air conditioning usage. In light of current economic conditions, the electric utilities have revised their five-year (1998-2002) sales forecast downward. The forecasted five-year average annual compounded growth rate has been lowered to 0.3% from 1.0%. HECO and its subsidiaries expect KWH sales to decline by 1.4% in 1998 and 0.7% in 1999, and to pick up thereafter, assuming Hawaii's economy improves. 25 COMPETITION The electric utility industry is becoming increasingly competitive as a result of various factors including pricing, service reliability, new technologies and government actions. Competition in the generation sector in Hawaii is moderated, however, by the scarcity of generation sites, various permitting processes and lack of interconnections to other electric utilities. Independent power producers (IPPs) are well established in Hawaii and continue to actively pursue new projects. Customer self-generation, with or without co- generation, has made inroads in Hawaii and is a continuing competitive factor. HECO has been able to compete successfully in this environment by offering customers economic alternatives that, among other things, employ energy efficient electrotechnologies such as the heat pump water heater. Legislation has been introduced in Congress that would restructure the electric utility industry with a view toward increasing competition by, for example, requiring retail wheeling and allowing customers to choose their generation supplier. Some of the bills would exempt Alaska and Hawaii, which have no interstate electric transmission lines. Also, the Department of Energy's proposed "Comprehensive Electricity Competition Act", submitted to Congress in June 1998, includes a provision that would permit states to "opt out" of the proposed retail competition deadline of not later than January 1, 2003. On December 30, 1996, the PUC instituted a proceeding to identify and examine the issues surrounding electric competition and to determine the impact of competition on the electric utility infrastructure in Hawaii. Similar proceedings have occurred in other jurisdictions. In its order, the PUC recognized that Hawaii's stand-alone island energy systems are different from the interconnected systems of the contiguous states, but also recognized the need to determine how to respond in Hawaii to changes occurring in the industry. The PUC set forth a preliminary enumeration of the issues, including feasible forms of competition, the regulatory compact, public interest benefits, long- term integrated resource planning, appropriate treatment of potential stranded costs, and the identification of the objectives and the establishment of a time frame for the introduction of competition in the electric industry. There are 19 parties in the proceeding including the Consumer Advocate of the State of Hawaii, HECO, HELCO and MECO (which presented a joint position), Citizens Utilities (which serves the island of Kauai), the Department of Business, Economic Development, and Tourism of the State of Hawaii (DBEDT), the Counties of Maui, Hawaii and Kauai, the Department of Defense (the DOD, HECO's largest customer), various IPPs and others. The PUC initiated a collaborative process to "compile information, create a discussion forum, and narrow the issues on the complexities of restructuring the electric industry in response to emerging competition." Following a number of meetings, and the submission and presentation to the collaborative group of preliminary statements of positions, the parties individually submitted final statements of positions (SOPs), which were compiled and sent to the PUC in October 1998. HECO's position is that retail competition is not feasible in Hawaii. The conditions making electric industry restructuring feasible in a number of states generally are not present in Hawaii. None of the island electric systems are interconnected and one electric utility physically can supply electricity to a particular island. In addition, (1) the island electricity markets are relatively small, and economies of scale and scope would be lost if the existing utilities were required to divest their generating or customer services functions, (2) there are barriers to entry by new generation suppliers, including the difficulty and time required to acquire and permit power plant sites in Hawaii, and the lack of access to low cost natural gas in Hawaii, and (3) transaction volume would not be sufficiently large to support the additional costs incurred to implement a competitive framework (such as the cost of an independent system operator) and the recovery of any stranded costs incurred by the utilities. If each individual generating station and purchased power contracts were "divested" to separate entities, HECO's market concentration analysis indicates that the electricity market would still be too concentrated to permit workable retail competition with respect to the generation of electricity. Market concentration analyses done for the CA and the DOD support HECO's position. However, based on its consultant's preliminary assessment of the extent to which market power would influence deregulated market prices in the Oahu market (with each existing generating plant and IPP facility assumed to compete as an individual supplier, and without regard to potential market constraints), DBEDT concluded that "competition appears feasible for Oahu's generation market." 26 In lieu of restructuring Hawaii's electric utility industry to permit retail generation and/or customer services competition, HECO proposes to achieve some of the benefits of competition through proposals for (1) competitive bidding for new generation, (2) performance based ratemaking (which would include an index- based price cap, an earnings sharing mechanism, and a benchmark incentive plan) and (3) innovative pricing provisions (including rate restructuring, expanded time-of-use rates, customer migration rates such as standby charges, flexible pricing to encourage economic development and to compete with customer generation options, new service options and two-part rates incorporating real- time pricing). HECO suggests in its statement of position that these proposals be implemented through applications for PUC approval in a series of separate proceedings to be initiated by HECO in 1999 and 2000. While the other parties' SOPs generally support competitive bidding for new generation, there is no consensus as to whether or as to the extent Hawaii's electricity markets should be restructured to introduce further competition. For example, the Consumer Advocate agrees that full scale retail generation competition is not now feasible in Hawaii, but proposes immediate rate unbundling and customer education, followed by rulemaking proceedings (1) to open transmission and distribution access on a limited basis (such as when new generation is needed) and determine the degree of any stranded cost recovery through nonbypassable access charges, (2) to permit conservation and energy management services to be provided to retail customers on a competitive basis, and (3) to implement competition for other customer services (metering and billing), as determined to be appropriate. The DOD also recognizes that retail generation competition is not now feasible, and proposes rate unbundling, the establishment of cost-based rates, the offering of additional rate options, performance based ratemaking, and investigation of the unbundling and separate pricing of customer services. DBEDT proposes (1) rate unbundling, (2) competition for customer services and energy efficiency services, and (3) if additional analysis by the PUC confirms the feasibility of retail generation competition on Oahu, open T&D access for generators, divestiture of generation and customer service functions by utilities, and formation of independent system operators (all targeted to 2002). The PUC will determine what procedural steps, if any, will follow the submittal of the parties' SOPs. No timetable has been set for such a determination. It is also possible that parties may seek legislative action on their proposals. PUC REGULATION OF ELECTRIC UTILITY RATES The PUC has broad discretion in its regulation of the rates charged by HEI's electric utility subsidiaries and in other matters. Any adverse decision and order (D&O) by the PUC concerning the level or method of determining electric utility rates, the authorized returns on equity or other matters, or any prolonged delay in rendering a D&O in a rate or other proceeding, could have a material adverse effect on the Company's financial condition and results of operations. Upon a showing of probable entitlement, the PUC is required to issue an interim D&O in a rate case within 10 months from the date of filing a completed application if the evidentiary hearing is completed (subject to extension for 30 days if the evidentiary hearing is not completed). There is no time limit for rendering a final D&O. Interim rate increases are subject to refund with interest, pending the final outcome of the case. Management cannot predict with certainty when D&Os in pending or future rate cases will be rendered or the amount of any interim or final rate increase that may be granted. In June 1998, PUC Chairman Yukio Naito resigned effective July 31, 1998 after serving on the PUC since 1988. On July 29, 1998, Governor Benjamin Cayetano named Dr. Gregory Pai as Mr. Naito's replacement on the PUC effective August 1, 1998 and named Mr. Dennis Yamada as Chairman. Mr. Yamada has served on the PUC since July 1994 and has recently been confirmed for a six year term ending June 30, 2004. Dr. Pai's nomination is subject to Senate approval. The third commissioner, Ms. Rae Loui, has served on the PUC since January 1998. 27 RECENT RATE REQUESTS HEI's electric utility subsidiaries initiate PUC proceedings from time to time to request electric rate increases to cover rising operating costs, the cost of purchased power and the cost of plant and equipment, including the cost of new capital projects to maintain and improve service reliability. Hawaii Electric Light Company, Inc. - ----------------------------------- In March 1998, HELCO filed a request to increase rates 11.5%, or $17.3 million in annual revenues, based on a 1999 test year and a 12.5% return on average common equity (ROACE), primarily to recover costs relating to two power generation projects--an agreement to buy power from Encogen's 60megawatt (MW) plant in Hamakua and the cost of adding generating units at HELCO's Keahole power plant. The Encogen agreement has been submitted to the PUC for approval. Under HELCO's request, the portion of the rate increase related to Encogen's generators would not go into effect until the facilities are completed and providing electricity to HELCO. Maui Electric Company, Limited - ------------------------------ In May 1996, MECO filed a request to increase rates 13%, or $18.9 million in annual revenues, based on a 1997 test year and a 12.9% ROACE, primarily to recover the costs related to the anticipated 1997 addition of new generating unit M17. In November 1996, MECO filed a motion with the PUC to approve a stipulation between MECO and the Consumer Advocate which would provide MECO with an increase in annual revenues of $1.5 million, based on an 11.65% ROACE. In May 1997, the stipulated increase was revised to $1.3 million after considering the final decision in the 1996 test year case. The primary reason for the stipulation was a delay in the expected in-service date for MECO's generating unit M17 until late 1998 because of delays in obtaining the necessary Prevention of Significant Deterioration/Covered Source (PSD) permit from the Department of Health of the State of Hawaii (DOH) and the U.S. Environmental Protection Agency (EPA). In December 1997, MECO received a final D&O authorizing no additional increase in annual revenues, based on an 11.12% ROACE. In January 1998, MECO received a PSD permit for generating unit M17 and filed a request to increase rates by 15.3%, or $22.4 million in annual revenues, based on a 12.75% ROACE and a 1999 test year, primarily to recover the costs related to the anticipated addition of unit M17 in late 1998. To expedite the rate case proceedings, in October 1998, MECO and the Consumer Advocate negotiated a compromise agreement which, if accepted by the PUC, will resolve most of the issues raised by the Consumer Advocate. The agreement provides for a $3.4 million reduction in the costs accumulated as of September 30, 1998 for the construction of M17. The $3.4 million reduction in M17 costs will result in a charge to expenses which will reduce MECO's net income by $3.0 million in the fourth quarter of 1998 (regardless of whether the PUC accepts the compromise agreement). Total estimated costs for the construction of M17 expected to be included in MECO's rate base amount to $56.4 million. The M17 construction project will be segregated into sub-projects, thereby allowing for more frequent additions to plant in service and a reduced level of allowance for funds used during construction. MECO's final position in the case (which incorporates the compromise agreement between MECO and the Consumer Advocate) is a requested increase of $16.4 million in annual revenues, or 11.9%, based on a 12.75% ROACE. The remaining significant issue to be resolved relates to the ROACE to be used in determining MECO's cost of capital. The midpoint of the ROACE range recommended by the Consumer Advocate was 10.5%. Evidentiary hearings on MECO's rate increase request, which were limited to the issue of the appropriate ROACE, were held on October 27, 1998. CONTINGENCIES See note (4) in HECO's "Notes to consolidated financial statements." 28 SAVINGS BANK - ------------
Three months ended September 30, ----------------------- % Primary reason(s) for (dollars in thousands) 1998 1997 change significant change - ------------------------------------------------------------------------------------------------------------------ Revenues....................... $103,229 $71,625 44 Higher interest income as a result of the higher average interest-earning assets balance due to the acquisition of most of the Hawaii operations of BoA, partly offset by the lower weighted average yields on these assets Operating income............... 13,398 11,847 13 Higher net interest income and other income due to the BoA acquisition, partly offset by an increase in operating expenses as a result of the BoA acquisition and a higher provision for loan losses Net income..................... 7,904 7,040 12 Higher operating income and lower income taxes, partly offset by preferred stock dividends Interest rate spread........... 2.99% 2.90% 3 36 basis points decrease in the weighted average rate on interest-bearing liabilities, partly offset by 27 basis points decrease in the weighted average yield on interest-earning assets
Nine months ended September 30, ------------------------ % Primary reason(s) for (dollars in thousands) 1998 1997 change significant change - -------------------------------------------------------------------------------------------------------------- Revenues.................. $306,324 $210,211 46 See explanation above Operating income.......... 42,079 36,368 16 See explanation above Net income................ 23,616 21,311 11 See explanation above Interest rate spread...... 3.10% 2.96% 5 33 basis points decrease in the weighted average rate on interest-bearing liabilities, partly offset by a 19 basis points decrease in the weighted average yield on interest-earning assets
ASB's revenues, operating income and net income for the third quarter and first nine months of 1998 reflect the results of the acquired BoA Hawaii operations. Partly offsetting the higher results compared to the first nine months of 1997 were increased consulting expenditures to consolidate and streamline operations and an increase in ASB's loan loss provision. Hawaii's weak economy, including the effects of increased delinquencies, and the relatively flat yield curve has reduced some of the earnings increase expected from the acquired BoA Hawaii operations. 29 ASB's interest rate spread--the difference between the weighted average yield on interest-earning assets and the weighted average rate on interest-bearing liabilities--increased 3% and 5% for the third quarter and first nine months of 1998 compared to same periods in 1997. Comparing the first nine months of 1998 to the same period in 1997, the decrease in the weighted average rate on interest-bearing liabilities was greater than the decrease in the weighted average yield on interest-earning assets. In October 1998, ASB lowered the rates paid on passbook and savings accounts by 50 basis points and on checking accounts by 25 basis points. Deposits traditionally have been the principal source of ASB's funds for use in lending, meeting liquidity requirements and making investments. In December 1997, ASB was able to grow significantly through the assumption of $1.7 billion of BoA's Hawaii deposits. ASB experienced an outflow of deposits of $180 million in the first nine months of 1998, partly offset by $95 million of interest credited to accounts. ASB also derives funds from borrowings, payments of interest and principal on outstanding loans receivable and mortgage-backed securities, and other sources. In recent years, advances from the Federal Home Loan Bank (FHLB) of Seattle and securities sold under agreements to repurchase have become more significant sources of funds as the demand for deposits decreased due in part to increased competition from money market and mutual funds. Using sources of funds with a higher cost than deposits, such as advances from the FHLB, puts downward pressure on ASB's interest rate spread and net interest income. In the slow Hawaii economy, ASB has experienced an increase in nonaccrual loans and loan loss reserves. During the first nine months of 1998, ASB added $9.5 million to its allowance for loan losses--95% more than the additions made in the same period last year. As of September 30, 1998, ASB's allowance for loan losses was 1.18% of average loans outstanding. The following table presents the changes in the allowance for loan losses for the periods indicated.
Nine months ended September 30, ----------------------------- (in thousands) 1998 1997 - ----------------------------------------------------------------------------------------------------------------------- Allowance for loan losses, beginning of period...................................... $29,950 $19,205 Additions to provisions for losses.................................................. 9,473 4,860 Allowance for losses on loans returned to BoA....................................... (107) - Net charge-offs..................................................................... (2,719) (1,432) ------- ------- Allowance for loan losses, end of period............................................ $36,597 $22,633 ======= =======
On March 27, 1998, ASB formed a wholly owned operating subsidiary, ASB Realty Corporation (ASBR). ASBR elects to be taxed as a real estate investment trust (REIT). ASBR's objective is to acquire, hold, finance and manage qualifying REIT assets. For the third quarter of 1998, in spite of a 13% increase in operating income, ASB and subsidiaries' income taxes were $0.7 million lower than the same period in 1997. 30 OTHER - -----
Three months ended September 30, -------------------------- % Primary reason(s) for (in thousands) 1998 1997 change significant change - ---------------------------------------------------------------------------------------------------------------- Revenues.................. $14,405 $16,595 (13) HEIIC's higher investment gains in prior year, partly offset by HEIPC's higher Guam revenues and freight transportation subsidiaries' higher general freight revenues in 1998 Operating loss............ (2,365) 1,072 NM HEIIC's higher investment gains in prior year and, in 1998, HEIPC's higher business development expenses, partly offset by higher freight transportation operating income (see below) Nine months ended September 30, ----------------------------- % Primary reason(s) for (in thousands) 1998 1997 change significant change - ---------------------------------------------------------------------------------------------------------------- Revenues.................. $44,023 $43,717 1 HEIPC's higher Guam revenues and freight transportation subsidiaries' higher general freight revenues, partly offset by HEIIC's higher investment gains in prior year Operating loss............ (4,730) (2,318) NM HEIIC's higher investment gains in prior year and, in 1998, HEIPC's higher business development expenses, partly offset by higher freight transportation operating income (see below)
NM Not meaningful. The "other" business segment includes results of operations from Hawaiian Tug & Barge Corp. (HTB) and its subsidiary, Young Brothers, Limited (YB), maritime freight transportation companies; HEI Investment Corp. (HEIIC), a company primarily holding investments in leveraged leases; HEI Power Corp. (HEIPC) and its subsidiaries, companies formed to pursue independent power and integrated energy services projects in Asia and the Pacific; Pacific Energy Conservation Services, Inc., a contract services company primarily providing windfarm operational and maintenance services to an affiliate; HEI District Cooling, Inc., a company formed to develop, build, own, operate and/or maintain, either directly or indirectly, central chilled water, cooling system facilities, and other energy related products and services for commercial and residential buildings; Hawaiian Electric Industries Capital Trust I, HEI Preferred Funding, LP and Hycap Management, Inc., companies formed primarily for the purpose of effecting the issuance of 8.36% Trust Originated Preferred Securities; HEI and HEI Diversified, Inc. (HEIDI), holding companies; and eliminations of intercompany transactions. Subsequent to September 30, 1998, ProVision Technologies, Inc. was formed to sell, install, operate and maintain on-site power generation equipment and auxiliary appliances in Hawaii and the Pacific Rim. FREIGHT TRANSPORTATION The freight transportation subsidiaries recorded operating income of $1.0 million and $3.2 million in the third quarter and first nine months of 1998, respectively, compared with $0.6 million and $1.4 million in the same periods of 1997. The higher operating incomes for 1998 are due to higher general freight revenues and lower operating expenses, resulting from lower labor related expenses and a PUC approved sailing schedule modification. The freight transportation subsidiaries, however, continue to be negatively impacted by the slow economic activity on Oahu's neighbor islands and the slow construction industry in Hawaii. 31 In March 1997, YB filed a request with the PUC for a general rate increase of 8.2%. In September 1997, the PUC approved YB's request for a modification in its sailing schedule that resulted in a reduction in YB's requested rate increase from 8.2% to 5.7%. In October 1997, YB received a final D&O authorizing a 4.7%, or $1.7 million increase in annual revenues, based on a 14.1% ROACE. OTHER HEIPC was formed in 1995 and its subsidiaries have been and will be formed from time to time to pursue independent power and integrated energy services projects in Asia and the Pacific. HEIPC's consolidated operating losses were $1.0 million and $2.6 million in the third quarter and first nine months of 1998, respectively, compared with $0.5 million and $1.6 million in the same periods of 1997. The increases in 1998 operating losses were due to increased business development expenses, partly offset by operating income from the energy conversion agreement described below. In September 1996, an HEIPC subsidiary, HEI Power Corp. Guam (HPG), entered into a 20-year energy conversion agreement with the Guam Power Authority (GPA), pursuant to which HPG has repaired and is operating and maintaining two oil- fired 25-MW (net) units on GPA property at Tanguisson, Guam. In November 1996, HPG assumed operational control of the Tanguisson facility. HPG's total cost to repair the two units was $15 million. The GPA project site is contaminated with oil from spills occurring prior to HPG's assuming operational control. HPG has agreed to manage the operation and maintenance of GPA's waste oil recovery system at the project site consistent with GPA's oil recovery plan as approved by the EPA. GPA, however, has agreed to indemnify and hold HPG harmless from any pre-existing environmental liability. In September 1998, HEIPC (through a wholly owned subsidiary's 80% ownership of a Mauritius Company) acquired an effective 60% interest in a joint venture, Baotou Tianjiao Power Co., Ltd., formed to design, construct, own, operate and manage a 206-megawatt (net) coal-fired power plant to be located inside Baotou Iron & Steel Company's (BaoSteel's) complex in Inner Mongolia, People's Republic of China (PRC). BaoSteel, a state-owned enterprise and the fifth largest steel company in China, is a 25% partner in the joint venture and will purchase all the electricity generated. Ownership of the plant will be transferred, without charge, to BaoSteel in approximately 20 years. BaoSteel's current demand of 400 MWs is expected to exceed 700 MWs by the year 2000, following a major plant expansion. Construction has commenced and the units are expected to be online by the end of 2000. The total project cost is estimated at $115 million. HEIPC has committed to invest up to $100 million; however, contractor financing through the construction period and limited recourse project financing may be available, which would reduce the amount of equity to be invested. HEIPC is actively pursuing other projects in Asia and the Pacific. The success of any project undertaken by HEIPC will be dependent on many factors, including the economic, political, monetary, technological, regulatory and logistical circumstances surrounding each project and the location of the project. Due to political or regulatory actions or other circumstances, projects may be delayed or even prohibited. There is no assurance that any project undertaken by HEIPC will be successfully completed or acquired or that HEIPC's investment in any such project will not be lost, in whole or in part. HEIPC has committed to invest up to $115 million in connection with existing projects. HEIPC is pursuing additional international projects, which are subject to approval of the HEIPC and HEI Boards of Directors. CONTINGENCIES - ------------- See note (7) in HEI's "Notes to consolidated financial statements" for a discussion of environmental regulation. FUTURE ENVIRONMENTAL REGULATION - ------------------------------- On July 16, 1997, the EPA adopted national ambient air quality standards for certain particulate matter and ozone. The new standards will not require local pollution controls until 2004 for the ozone standards and 2005 for the particulate matter standards, with no compliance determinations until 2007 and 2008, respectively, and with possible extensions. The eventual impact of these new standards on the Company and consolidated HECO is not known at this time. 32 YEAR 2000 ISSUE - --------------- HEI consolidated HEI and its subsidiaries are aware of the Year 2000 date issues associated with the practice of encoding only the last two digits of four digit years in computer equipment, software and devices with imbedded technology. Year 2000 date issues, if not properly addressed, may result in computer errors that could cause a disruption of business operations. Further, the Company could be adversely impacted by Year 2000 date issues if suppliers, customers and other related businesses do not address the issues successfully. HEI and subsidiary management have developed Year 2000 programs and have teams in place that are actively assessing, renovating, validating and implementing Year 2000 ready systems. All significant computer-based systems are being included in the inventory and assessment process. Priority is being given to systems that are considered mission or business critical. The Company's mainframe computer and operating systems software, which serves HEI's operating subsidiaries, have been upgraded to Year 2000 ready versions, subject to testing targeted to be completed by June 1999. HEI and each business unit have appointed a Year 2000 project manager who provides periodic reporting to their respective senior management and board of directors. An oversight and reporting role has been established at the HEI corporate level. Both the electric utility and the savings bank segments are subject to external oversight by their respective regulators. Although substantial effort is being devoted to the Year 2000 issue, no absolute assurance can be given that HEI and its subsidiaries will successfully avoid all problems that may arise. Further, no absolute assurance can be given that the Year 2000 problems of other entities will not have a material adverse impact on HEI and its subsidiaries' systems or results of operations. Costs. Management believes that the cost to remediate its systems to become - ------ Year 2000 ready will not have a material adverse effect on the Company's financial condition, results of operations or liquidity. The total cost of initiatives undertaken primarily for Year 2000 remediation is estimated at $9 million, of which an immaterial amount has been incurred through September 30, 1998. The cost to remediate systems and the target dates provided represent management's best estimates at this time. These estimates are based on information provided by various work units within the Company and external parties such as vendors and business partners. Numerous assumptions have been made regarding future dates, including the continued availability of internal and external resources, third party remediation plans and the successful testing of mission critical systems. ELECTRIC UTILITY State of readiness. HECO and its subsidiaries have identified information - ------------------- technology (IT) and non-IT systems which will require Year 2000 remediation work. HECO has prioritized these systems by importance, business risk and Year 2000 exposure, allocating resources accordingly. Remediation work for each of the systems includes an assessment phase, a renovation and validation phase and an implementation phase. Overall, it is roughly estimated that 95% of the assessment phase for HECO and its subsidiaries' systems and 15% of the renovation and validation phase have been completed as of September 30, 1998, with lesser amounts of work completed on the implementation phase. The scheduled completion date for each system is before the date it is expected to encounter any Year 2000 impact. In December 1998, HECO and its subsidiaries will be replacing the majority of their business-critical applications with an integrated application suite that is represented to be Year 2000 ready. The installation of integrated application suites has both simplified and lowered the cost of Year 2000 remediation efforts. HECO and its subsidiaries have identified third parties with whom they have significant relationships and are corresponding with these vendors and service providers to determine their readiness. Letters have been sent to 272 vendors and 72% have responded to the inquiry. HECO and its subsidiaries continue to work with these third parties to ensure they understand their responsibilities to HECO and its subsidiaries and other business partners in the Year 2000 remediation process. Significant third parties include fuel suppliers, independent power producers, financial institutions and large customers. HECO has formed an Oahu Power Partners Year 2000 Group to provide a forum to share information among HECO, independent power producers and fuel suppliers. HECO is contracting with two of its major vendors of power plant equipment for their services in assessing, remediating and testing their installed control systems. Costs. HECO management believes that the cost to remediate its systems to become - ------ Year 2000 ready will not have a material adverse effect on consolidated HECO's financial condition, results of operations or liquidity. The total cost of initiatives undertaken primarily for Year 2000 remediation is estimated at $2 million, of which an immaterial amount has been incurred through September 30, 1998. Risks. The Year 2000 remediation effort addresses two distinct areas of - ------ risk--(1) electric systems, which deliver power to customers, and (2) business systems, which handle data processing, including the exchange of data with suppliers, vendors and customers. The worst case consequences if HECO is not Year 2000 ready could include temporary disruptions of the electric supply and critical business processes. Importantly, neither the generation 33 nor distribution systems are fully dependent on automated control systems. Because HECO and its subsidiaries have the capability to manually control the generation and dispatching of power and have some degree of diversity and redundancy in their systems, HECO believes the most reasonably likely worst case scenario would be brief, localized power outages and billing, collection and/or reporting errors or delays. HECO and its subsidiaries continue to identify and address the numerous scenarios which may result from not becoming Year 2000 ready. However, no absolute assurance can be given that HECO and its subsidiaries will successfully identify and avoid all problems that may arise from the Year 2000 issue. Contingency plans. Contingency plans in the event of a Year 2000 problem are - ------------------ being developed for HECO and its subsidiaries. HECO and its subsidiaries are accustomed to being self-sufficient because they have no interconnected power grids. HECO and its subsidiaries will have personnel on standby at midnight on December 31, 1999 and on other critical dates in 1999 and 2000, as deemed necessary. Work crews would be able to manually operate equipment, making a prolonged power outage or rolling blackouts unlikely. SAVINGS BANK State of readiness. ASB and its subsidiaries follow guidelines provided by the - ------------------ Office of Thrift Supervision (OTS). All savings banks use these same guidelines. The guideline requires ASB to first renovate its mission critical systems. ASB, in its assessment, identified IT and non-IT mission critical systems which will require Year 2000 remediation work. IT systems include outsourced and in-house main frame systems and applications, licensed vendor applications, ATMs, desktop applications and high speed check sorting. ASB has prioritized these systems by importance, business risk, and Year 2000 exposure, allocating resources accordingly. The OTS guideline uses a five-phase approach to Year 2000 remediation. Remediation work for each of the systems includes an awareness phase, assessment phase, renovation phase, validation phase and an implementation phase. As of September 30, 1998, the assessment of ASB's in-house mission critical systems has been completed. The renovation phase is approximately 84% complete. Validation (14% complete) and implementation (5% complete) are the focal points for ASB's remaining Year 2000 effort. ASB expects to substantially complete its internal mission critical testing by yearend 1998. Testing with business partners, service providers and vendors is expected to occur during the first quarter of 1999. ASB is targeting to implement all renovated mission critical systems by June of 1999. ASB and its subsidiaries also identified third parties with whom they have material relationships and continue to work with these third parties to ensure they understand their responsibilities to ASB, its subsidiaries and other business partners in the Year 2000 remediation process. Significant third parties include software-hardware systems providers, large customers and a service bureau. ASB has implemented a Customer Impact Program that monitors the activities of its large business and deposit customers. ASB monitors its service and supply vendors for Year 2000 compliance and 134 of 315 vendors have responded that they are compliant or are making efforts to be compliant by January 1, 2000. Year 2000 project coordinators are aware that adequate time must be factored into the planning to allow movement to an alternative service provider or suppliers. Project coordinators have been advised that a decision to continue doing business with current suppliers and vendors should be reached by June 30, 1999. Costs. The total cost of initiatives undertaken primarily for Year 2000 - ----- remediation is estimated at $6 million, of which an immaterial amount has been incurred through September 30, 1998. It is expected that approximately $3 million of the remediation costs will be incurred and expensed in the fourth quarter of 1998. Risks. The Year 2000 remediation effort addresses various areas of risk, - ----- primarily in ASB's business systems, including in-house applications, vendor applications, service bureau applications and electronic banking. ASB believes that the most likely worst case scenario would be a localized disruption of customer services. ASB believes off-line processing at any branch site is feasible for up to five working days. ASB and its subsidiaries continue to identify and address the numerous scenarios, which may result from not becoming Year 2000 ready. However, no absolute assurance can be given that ASB and its subsidiaries will successfully identify and avoid all problems that may arise from the Year 2000 issue. Contingency plans. ASB's contingency plans provide a global view of the steps - ----------------- that ASB could take if entire systems or partial systems were lost due to Year 2000 events. ASB has engaged a consultant to assist in developing detailed contingency plans for mission critical systems by yearend 1998. ASB will use these contingency plans to develop similar detailed plans for other ASB departments. ASB's contingency plans include implementing off-line or manual procedures, implementing stand-in programs and activating the disaster recovery plan and relocating certain operations to the recovery site. ASB will backup critical reports and files prior to yearend 1999. Further, ASB and its subsidiaries will have personnel on standby at midnight on December 31, 1999 and on other critical dates in 1999 and 2000, as deemed necessary. 34 ACCOUNTING CHANGES - ------------------ See note (6) and note (5) in HEI's and HECO's "Notes to consolidated financial statements," respectively. FINANCIAL CONDITION LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- The Company and consolidated HECO each believes that its ability to generate cash, both internally from operations and externally from debt and equity issues, is adequate to maintain sufficient liquidity to fund their respective construction programs and investments and to satisfy debt and other cash requirements in the foreseeable future. The consolidated capital structure of HEI was as follows:
(in millions) September 30, 1998 December 31, 1997 - -------------------------------------------------------------------------------------------------------------- Short-term borrowings.................................. $ 181 8% $ 285 14% Long-term debt......................................... 921 43 795 37 HEI- and HECO-obligated preferred securities of trust subsidiaries.................... 150 7 150 7 Preferred stock of electric utility subsidiaries....... 81 4 84 4 Common stock equity.................................... 823 38 815 38 ------ --- ------ --- $2,156 100% $2,129 100% ====== === ====== ===
ASB's deposit liabilities, securities sold under agreements to repurchase and advances from FHLB are not included in the table above. In February and June 1998, HEI issued $53 million and $60 million in medium-term notes bearing weighted average interest rates of 6.2% and 6.5%, respectively, and primarily used the proceeds to pay down short-term borrowings. On May 29, 1998, Standard & Poor's changed its outlook for HEI, HECO, HELCO and MECO securities from positive to stable, citing continuing weakness in Hawaii's economy as the reason for this change. For the first nine months of 1998, net cash provided by operating activities was $156 million. Net cash used in investing activities was $256 million, largely due to ASB's origination of loans and purchase of investment securities, net of repayments, and consolidated HECO's capital expenditures, partly offset by cash received from BoA for loans returned after the acquisition (in accordance with the provisions of the Purchase and Assumption Agreement). Net cash provided by financing activities was $109 million as a result of several factors, including net increases in securities sold under agreements to repurchase, long-term debt and advances from FHLB, partly offset by net decreases in short-term borrowings and deposit liabilities, and the payment of common stock dividends and preferred securities distributions. HEI estimates its consolidated requirements for funds for 1998 through 2002, including net capital expenditures (which exclude the allowance for funds used during construction and capital expenditures funded by third-party cash contributions in aid of construction), long-term debt retirements (excluding repayments of advances from the FHLB of Seattle and securities sold under agreements to repurchase) and sinking fund requirements, to total $1.1 billion. Of this amount, approximately $0.8 billion is for net capital expenditures (mostly relating to the electric utilities' net capital expenditures described below). HEI estimates that its consolidated internal sources, after the payment of HEI dividends, will provide approximately 53% of the consolidated requirements, with debt financing providing the remaining requirements. The increase in consolidated requirements and the decrease in the percentage of internally generated funds are due in part to the investment in the Baotou Tianjiao Power Co., Ltd. joint venture and higher capital expenditures of the electric utilities. Additional debt and equity financing may be required to fund activities not included in the 1998-2002 forecast, such as the development of additional power projects in the Asia Pacific region, or to fund changes in requirements, such as increases in the amount of or acceleration of capital expenditures of the electric utilities. 35 Following is a discussion of the liquidity and capital resources of HEI's largest segments. ELECTRIC UTILITY HECO's consolidated capital structure was as follows:
(in millions) September 30, 1998 December 31, 1997 - ------------------------------------------------------------------------------------------ Short-term borrowings from nonaffiliates and affiliate......... $ 96 6% $ 96 6% Long-term debt....................... 643 39 628 39 HECO-obligated preferred securities 3 of trust subsidiary................. 50 50 3 Preferred stock...................... 81 5 84 5 Common stock equity.................. 789 47 769 47 ------ --- ------ --- $1,659 100% $1,627 100% ====== === ====== ===
Operating activities provided $132 million in net cash during the first nine months of 1998. Investing activities used net cash of $91 million, primarily for capital expenditures. Financing activities used net cash of $38 million, including $49 million for the payment of common and preferred dividends and preferred securities distributions and $3 million for preferred stock redemptions, partially offset by the $15 million net increase in long-term debt. The electric utilities estimate their consolidated requirements for funds for 1998 through 2002, including net capital expenditures, long-term debt retirements and sinking fund requirements, will total $706 million. HECO estimates that its consolidated internal sources, after the payment of common stock and preferred stock dividends, will provide approximately 70% of the consolidated requirements, with debt and equity financing providing the remaining requirements. As of September 30, 1998, approximately $39 million of proceeds from previous sales by the Department of Budget and Finance of the State of Hawaii of special purpose revenue bonds on behalf of HECO, MECO and HELCO remain undrawn. Also as of September 30, 1998, an additional $88 million of special purpose revenue bonds were authorized by the Hawaii Legislature for issuance by the Department of Budget and Finance of the State of Hawaii on behalf of HECO and MECO prior to the end of 1999 and an additional $100 million of revenue bonds were authorized for issuance on behalf of HECO and HELCO prior to the end of 2003. The PUC must approve issuances of long-term securities by HECO, MECO and HELCO. Capital expenditures include the costs of projects that are required to meet expected load growth, to improve reliability and to replace and upgrade existing equipment. The electric utilities estimate that net capital expenditures for the five-year period 1998 through 2002 will total $624 million. Approximately 64% of forecast gross capital expenditures, which include the allowance for funds used during construction and capital expenditures funded by third-party cash contributions in aid of construction, is for transmission and distribution projects, with the remaining 36% primarily for generation projects. For 1998, electric utility net capital expenditures are estimated to be $141 million. Gross capital expenditures are estimated to be $173 million, comprised of approximately $120 million for transmission and distribution projects, approximately $30 million for new generation projects and approximately $23 million for general plant and existing generation projects. Drawdowns of proceeds from sales of tax-exempt special purpose revenue bonds and the generation of funds from internal sources are expected to provide the cash needed for the net capital expenditures. Management periodically reviews capital expenditure estimates and the timing of construction projects. These estimates may change significantly as a result of many considerations, including changes in economic conditions, changes in forecasts of KWH sales and peak load, the availability of purchased power, the availability of generating sites and transmission and distribution corridors, the ability to obtain adequate and timely rate increases, escalation in construction costs, demand-side management programs and requirements of environmental and other regulatory and permitting authorities. 36 SAVINGS BANK
September 30, December 31, % (in millions) 1998 1997 change - -------------------------------------------------------------------------------------------------------------------------------- Total assets............................................... $5,684 $5,548 2% Mortgage-backed securities................................. 1,863 1,865 - Loans receivable, net...................................... 3,126 3,036 3 Deposit liabilities........................................ 3,832 3,917 (2) Securities sold under agreements to repurchase............. 535 375 43 Advances from Federal Home Loan Bank....................... 823 736 12
As of September 30, 1998, ASB was the third largest financial institution in the state based on total assets of $5.7 billion and deposits of $3.8 billion. For the first nine months of 1998, net cash provided by ASB's operating activities was $22 million. Net cash used in ASB's investing activities was $150 million, due largely to the origination of loans and the purchase of investment securities, partly offset by principal repayments and the cash received from BoA for loans returned to BoA after the acquisition. Net cash provided by financing activities was $143 million largely due to a net increase of $159 million in securities sold under agreements to repurchase and of $87 million in advances from FHLB, partly offset by a net decrease of $85 million in deposit liabilities and by $14 million in common and preferred stock dividends. Minimum liquidity levels are currently governed by the regulations adopted by the Office of Thrift Supervision, Department of Treasury (OTS). ASB was in compliance with OTS liquidity requirements as of September 30, 1998. ASB believes that a satisfactory regulatory capital position provides a basis for public confidence, affords protection to depositors, helps to ensure continued access to capital markets on favorable terms and provides a foundation for growth. As of September 30, 1998, ASB was in compliance with the OTS minimum capital requirements (noted in parentheses) with a tangible capital ratio of 5.2% (1.5%), a core capital ratio of 5.3% (3.0%) and a risk-based capital ratio of 12.7% (8.0%). FDIC regulations restrict the ability of financial institutions that are not "well-capitalized" to compete on the same terms as "well-capitalized" institutions, such as by offering interest rates on deposits that are significantly higher than the rates offered by competing institutions. As of September 30, 1998, ASB was "well-capitalized" (ratio requirements noted in parentheses) with a leverage ratio of 5.3% (5.0%), a Tier-1 risk-based ratio of 11.6% (6.0%) and a total risk-based ratio of 12.7% (10.0%). The federal and state governments have enacted significant interstate banking legislation. Under the federal Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, a bank holding company may acquire control of a bank in any state, subject to certain restrictions. Under Hawaii law, effective June 1, 1997, a bank chartered under Hawaii law may merge with an out-of-state bank and convert all branches of both banks into branches of a single bank, subject to certain restrictions. Although the federal and Hawaii laws do not apply to thrifts, such legislation may nonetheless affect the competitive balance among banks, thrifts and other financial institutions and the level of competition among financial institutions doing business in Hawaii. For a discussion of the unfavorable disparity in the deposit insurance assessment rates and Financing Corporation assessment rates that ASB and other thrifts have paid in relation to the rates that most commercial banks have paid, and certain legislation affecting financial institutions, see note (3) in HEI's "Notes to consolidated financial statements." 37 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - ------------------------------------------------------------------ The Company's results are impacted by ASB's ability to manage interest rate risk. For quantitative and qualitative information about the Company's market risks, see pages 37 to 39 of HEI's 1997 Annual Report to Stockholders. U.S. Treasury yields at September 30, 1998 and December 31, 1997 were as follows:
(%) September 30, 1998 December 31, 1997 --- ------------------ ----------------- 3 month 4.35 5.34 1 year 4.39 5.48 3 year 4.38 5.66 5 year 4.22 5.71 7 year 4.37 5.76 10 year 4.41 5.74 20 year 5.16 6.01 30 year 4.97 5.92
As interest rates (as measured by U.S. Treasury yields) have declined between 85 and 149 basis points from December 31, 1997 to September 30, 1998, management believes there has been a favorable change with respect to the Company's quantitative disclosures of its interest-sensitive assets, liabilities and off- balance sheet items because a larger amount of liabilities than assets are repricing in the short-term. PART II - OTHER INFORMATION - -------------------------------------------------------------------------------- ITEM 1. LEGAL PROCEEDINGS - -------------------------- There are no significant developments in pending legal proceedings except as set forth in HEI's and HECO's "Notes to consolidated financial statements," and management's discussion and analysis of financial condition and results of operations. ITEM 5. OTHER INFORMATION - -------------------------- A. HECO, MECO and HELCO collective bargaining agreement In August 1998, HECO, MECO and HELCO employees represented by the International Brotherhood of Electrical Workers (IBEW), AFL-CIO, Local 1260, ratified new agreement provisions covering approximately 67% of the employees of HECO, HELCO and MECO. The new agreements cover a two-year period from November 1, 1998 through October 31, 2000. The main provisions of the agreements include noncompounded wage increases of 1.5% effective May 1, 1999 and 2.0% effective January 1, 2000, and lump sum payments of $350 or $500 per employee following ratification. Benefit provisions include increased employee contributions for medical coverage, limits on employer contributions for postretirement health benefits applicable to current and future employees, and a drug plan in lieu of the dental and vision plans for future retirees when they become eligible for Medicare coverage. Revisions to the pension plan include a new pre-retirement survivor benefit for single employees and a partial lump sum pension benefit option. Both parties also signed an agreement committing the parties to work towards resolving issues in order to succeed in a competitive environment, seeking improvements in efficiency and service, while lowering costs, which will include changes in work practices and rules. B. MECO air quality compliance On November 1, 1989, the Department of Health of the State of Hawaii (DOH) issued a Notice of Violation (NOV) indicating that Maalaea units X-1 and X-2 had exceeded operating limitations of 12 hours per day at various times in 1988. These incidents resulted from unscheduled unit outages and resulted in no net increase in emissions by MECO. Subsequently, MECO took steps to preclude future violations. An application for a permit modification was submitted to the EPA and approval was received from the EPA in July 1992. Units X-1 and X-2 continue to operate in compliance with the revised permit. 38 Following a unit overhaul, emission compliance tests conducted for MECO's Maalaea Unit 14 in late 1995 indicated that particulate emissions were in excess of PSD permit limits. Corrective actions were taken and a retest in February 1996 confirmed that the unit returned to compliance with PSD limits. All test reports were submitted to the DOH. By letter dated July 15, 1996, the DOH indicated that a NOV would be issued for the past violations. By letter dated January 31, 1997, the DOH invited MECO to meet to discuss settlement of open matters. An agreement was reached with the DOH to resolve the NOV issued for X-1 and X-2 operating hours during 1988 and any other air permit violations which may have occurred from November 1, 1989 until November 1, 1996 (including past violations of Maalaea Unit 14 discussed in the previous paragraph). MECO and the DOH executed a final consent order, disposing of the NOV, dated August 10, 1998. In accordance with the order, MECO will pay $100,000 over two years to the Hawaii Nature Center for funding environmental education projects. C. Ratio of earnings to fixed charges The following tables set forth the ratio of earnings to fixed charges for HEI and its subsidiaries for the periods indicated: RATIO OF EARNINGS TO FIXED CHARGES EXCLUDING INTEREST ON ASB DEPOSITS
Nine months Years ended December 31, ended -------------------------------------------- September 30, 1998 1997 1996 1995 1994 1993 ------------------ ---- ---- ---- ---- ---- 1.90 1.89 1.93 2.02 2.31 2.34 ================== ==== ==== ==== ==== ====
RATIO OF EARNINGS TO FIXED CHARGES INCLUDING INTEREST ON ASB DEPOSITS
Nine months Years ended December 31, ended -------------------------------------------- September 30, 1998 1997 1996 1995 1994 1993 ------------------ ---- ---- ---- ---- ---- 1.49 1.58 1.56 1.60 1.73 1.69 ================== ==== ==== ==== ==== ====
For purposes of calculating the ratio of earnings to fixed charges, "earnings" represent the sum of (i) pretax income from continuing operations (excluding undistributed net income or net loss from less than fifty-percent-owned persons) and (ii) fixed charges (as hereinafter defined, but excluding capitalized interest). "Fixed charges" are calculated both excluding and including interest on ASB's deposits during the applicable periods and represent the sum of (i) interest, whether capitalized or expensed, incurred by HEI and its subsidiaries plus their proportionate share of interest on debt to outsiders incurred by fifty-percent-owned persons, but excluding interest on nonrecourse debt from leveraged leases which is not included in interest expense in HEI's consolidated statements of income, (ii) amortization of debt expense and discount or premium related to any indebtedness, whether capitalized or expensed, (iii) the interest factor in rental expense, (iv) the preferred stock dividend requirements of HEI's subsidiaries, increased to an amount representing the pretax earnings required to cover such dividend requirements and (v) the preferred securities distribution requirements of trust subsidiaries. 39 The following table sets forth the ratio of earnings to fixed charges for HECO and its subsidiaries for the periods indicated: RATIO OF EARNINGS TO FIXED CHARGES
Nine months Years ended December 31, ended -------------------------------------------- September 30, 1998 1997 1996 1995 1994 1993 ------------------ ---- ---- ---- ---- ---- 3.36 3.26 3.58 3.46 3.47 3.25 ================== ==== ==== ==== ==== ====
For purposes of calculating the ratio of earnings to fixed charges, "earnings" represent the sum of (i) pretax income before preferred stock dividends of HECO and (ii) fixed charges (as hereinafter defined, but excluding the allowance for borrowed funds used during construction). "Fixed charges" represent the sum of (i) interest, whether capitalized or expensed, incurred by HECO and its subsidiaries, (ii) amortization of debt expense and discount or premium related to any indebtedness, whether capitalized or expensed, (iii) the interest factor in rental expense, (iv) the preferred stock dividend requirements of HELCO and MECO, increased to an amount representing the pretax earnings required to cover such dividend requirements and (v) the preferred securities distribution requirements of the trust subsidiary. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K - ----------------------------------------- (A) EXHIBITS HEI Hawaiian Electric Industries, Inc. and subsidiaries Exhibit 12.1 Computation of ratio of earnings to fixed charges, nine months ended September 30, 1998 and 1997 HECO Hawaiian Electric Company, Inc. and subsidiaries Exhibit 12.2 Computation of ratio of earnings to fixed charges, nine months ended September 30, 1998 and 1997 HEI Hawaiian Electric Industries, Inc. and subsidiaries Exhibit 27.1 Financial Data Schedule September 30, 1998 and nine months ended September 30, 1998 HEI Hawaiian Electric Industries, Inc. and subsidiaries Exhibit 27.1(a) Financial Data Schedule September 30, 1997 and nine months ended September 30, 1997 HECO Hawaiian Electric Company, Inc. and subsidiaries Exhibit 27.2 Financial Data Schedule September 30, 1998 and nine months ended September 30, 1998 HECO Hawaiian Electric Company, Inc. and subsidiaries Exhibit 27.2(a) Financial Data Schedule September 30, 1997 and nine months ended September 30, 1997 HEI Tenth Amendment to Trust Agreement, made and entered into Exhibit 99.1 on August 1, 1998, Between Fidelity Management Trust Company and HEI for the Hawaiian Electric Industries Retirement Savings Plan for incorporation by reference in the Registration Statement on Form S-8 (Regis. No. 333- 02103)
40 (B) REPORTS ON FORM 8-K Since June 30, 1998, HEI and/or HECO filed Current Reports, Forms 8-K, with the SEC as follows:
Dated Registrant/s Items reported - --------------------------------------------------------------------------------------------------------- August 3, 1998 HEI Item 5, HEI's settlement with insurance carriers September 3, 1998 HEI Item 5, News release: Hawaiian Electric Industries, Inc. subsidiary acquires 60% interest in power plant in China September 16, 1998 HEI Item 5, News release: Hawaiian Electric Industries, Inc. announces plan to exit residential real estate business October 19, 1998 HEI/HECO Item 5, News release: Hawaiian Electric Industries, Inc. reports third quarter earnings. Excerpts from Form S-3 registration statement to be filed by HECO related to the issuance of trust preferred securities
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrants have duly caused this report to be signed on their behalf by the undersigned, thereunto duly authorized. The signature of the undersigned companies shall be deemed to relate only to matters having reference to such companies and any subsidiaries thereof. HAWAIIAN ELECTRIC INDUSTRIES, INC. HAWAIIAN ELECTRIC COMPANY, INC. (Registrant) (Registrant) By /s/ Robert F. Mougeot By /s/ Paul Oyer ---------------------------- ---------------------------- Robert F. Mougeot Paul A. Oyer Financial Vice President and Financial Vice President and Chief Financial Officer Treasurer (Principal Financial Officer (Principal Financial Officer of HEI) of HECO) Date: November 5, 1998 Date: November 5, 1998 41 EX-12.1 2 COMPUTATION OF RATIO OF EARNINGS - HEI HEI Exhibit 12.1 ---------------- Hawaiian Electric Industries, Inc. and subsidiaries COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (unaudited)
Nine months ended September 30, --------------------------------------------------- (dollars in thousands) 1998 (1) 1998 (2) 1997 (1) 1997 (2) - --------------------------------------------------------------------------------------------------------------- FIXED CHARGES Total interest charges (3)............................ $108,333 $216,610 $100,480 $162,901 Interest component of rentals......................... 2,648 2,648 2,227 2,227 Pretax preferred stock dividend requirements of subsidiaries......................................... 7,172 7,172 7,766 7,766 Preferred securities distribution requirements of trust subsidiaries................................... 9,289 9,289 7,503 7,503 -------- -------- -------- -------- TOTAL FIXED CHARGES................................... $127,442 $235,719 $117,976 $180,397 ======== ======== ======== ======== EARNINGS Pretax income from continuing operations.............. $119,659 $119,659 $115,543 $115,543 Fixed charges, as shown above......................... 127,442 235,719 117,976 180,397 Interest capitalized.................................. (5,145) (5,145) (4,658) (4,658) -------- -------- -------- -------- EARNINGS AVAILABLE FOR FIXED CHARGES.................. $241,956 $350,233 $228,861 $291,282 ======== ======== ======== ======== RATIO OF EARNINGS TO FIXED CHARGES.................... 1.90 1.49 1.94 1.61 ======== ======== ======== ========
(1) Excluding interest on ASB deposits. (2) Including interest on ASB deposits. (3) Total interest charges exclude interest on nonrecourse debt from leveraged leases which is not included in interest expense in HEI's consolidated statements of income. EX-12.2 3 COMPUTATION OF RATIO OF EARNINGS - HE CO. HECO Exhibit 12.2 ----------------- Hawaiian Electric Company, Inc. and subsidiaries COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (unaudited)
Nine months ended September 30, --------------------------------------- (dollars in thousands) 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------- FIXED CHARGES Total interest charges........................................................... $ 36,784 $ 36,551 Interest component of rentals.................................................... 552 577 Pretax preferred stock dividend requirements of subsidiaries..................... 3,062 3,125 Preferred securities distribution requirements of trust subsidiary............... 3,019 2,046 -------- -------- TOTAL FIXED CHARGES.............................................................. $ 43,417 $ 42,299 ======== ======== EARNINGS Income before preferred stock dividends of HECO.................................. $ 65,519 $ 60,500 Income taxes (see note below).................................................... 42,213 38,824 Fixed charges, as shown above.................................................... 43,417 42,299 AFUDC for borrowed funds......................................................... (5,145) (4,658) -------- -------- EARNINGS AVAILABLE FOR FIXED CHARGES............................................. $146,004 $136,965 ======== ======== RATIO OF EARNINGS TO FIXED CHARGES............................................... 3.36 3.24 ======== ======== Note: Income tax is comprised of the following-- Income tax expense relating to operating income from regulated activities......................................................... $42,253 $38,848 Income tax benefit relating to loss from nonregulated activities...................................................... (40) (24) -------- -------- $42,213 $38,824 ======== ========
EX-27.1 4 FDS [HAWAIIAN ELEC. INDUST.] 9 MOS. ENDED 9/30/98
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM HAWAIIAN ELECTRIC INDUSTRIES, INC. AND SUBSIDIARIES' CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1998 AND CONSOLIDATED STATEMENT OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000354707 HAWAIIAN ELECTRIC INDUSTRIES, INC. 1,000 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 275,102 2,014,291 156,592 0 33,828 0 3,124,582 1,048,822 8,116,740 0 920,737 83,180 148,293 659,470 164,046 8,116,740 0 1,112,841 0 939,967 (130) 0 53,345 119,659 46,140 73,519 (9,817) 0 0 63,702 1.99 1.98 REPRESENTS BASIC EPS
EX-27.1(A) 5 FDS [HAWAIIAN ELEC. INDUST.] 9 MOS. ENDED 9/30/97
5 THIS RESTATED SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM HAWAIIAN ELECTRIC INDUSTRIES, INC. AND SUBSIDIARIES' CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1997 AND CONSOLIDATED STATEMENT OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000354707 HAWAIIAN ELECTRIC INDUSTRIES, INC. 1,000 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 124,068 1,482,388 151,833 0 42,786 0 2,940,242 956,227 6,209,345 0 795,718 86,070 148,293 647,062 156,374 6,209,345 0 1,085,242 0 924,057 (537) 0 46,179 115,543 47,517 68,026 (4,430) 0 0 63,596 2.04 2.03 REPRESENTS BASIC EPS
EX-27.2 6 FDS [HAWAIIAN ELEC. CO.] 9 MOS. ENDED 9/30/98
UT THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM HAWAIIAN ELECTRIC COMPANY, INC. AND SUBSIDIARIES' CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1998 AND CONSOLIDATED STATEMENT OF INCOME AND CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000046207 HAWAIIAN ELECTRIC COMPANY, INC. 1,000 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 PER-BOOK 1,933,177 0 156,772 12,696 144,054 2,246,699 85,387 296,364 406,719 788,470 81,585 48,293 613,137 0 0 95,434 30,000 1,595 0 0 588,185 2,246,699 755,615 42,253 626,490 668,743 86,872 15,220 102,092 36,573 65,519 2,592 62,927 43,790 45,115 132,103 0 0
EX-27.2(A) 7 FDS [HAWAIIAN ELEC. CO.] 9 MOS. ENDED 9/30/97
UT THIS RESTATED SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM HAWAIIAN ELECTRIC COMPANY, INC. AND SUBSIDIARIES' CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1997 AND CONSOLIDATED STATEMENT OF INCOME AND CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000046207 HAWAIIAN ELECTRIC COMPANY, INC. 1,000 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 PER-BOOK 1,876,652 0 171,050 11,904 141,408 2,201,014 85,387 296,231 384,003 765,621 84,375 48,293 597,718 2,900 0 113,607 0 1,695 0 0 586,805 2,201,014 824,762 38,848 703,757 742,605 82,157 14,233 96,390 35,890 60,500 2,746 57,754 41,521 40,894 97,667 0 0
EX-99.1 8 TENTH AMENDMENT TO TRUST AGREEMENT HEI Exhibit 99.1 ---------------- TENTH AMENDMENT TO TRUST AGREEMENT BETWEEN FIDELITY MANAGEMENT TRUST COMPANY AND HAWAIIAN ELECTRIC INDUSTRIES, INC. THIS TENTH AMENDMENT TO TRUST AGREEMENT, is made and entered into August 1, 1998, by and between Fidelity Management Trust Company (the "Trustee") and Hawaiian Electric Industries, Inc. (the "Sponsor"); WITNESSETH: WHEREAS, the Trustee and the Sponsor heretofore entered into a Trust Agreement dated November 28, 1988, and amended December 22, 1989, January 1, 1994, March 15, 1994, February 1, 1996, April 1, 1996, April 1, 1997, June 13, 1997, February 27, 1998 and May 4, 1998 (the "Trust Agreement") for the Hawaiian Electric Industries Retirement Savings Plan (the "Plan"); and WHEREAS, the Trustee and the Sponsor wish to further amend said Trust Agreement as provided in Section 13 thereunder; and WHEREAS, effective July 1, 1998, the Sponsor and Trustee wish to revise the Annual Participation Fee and the Trustee Fee; and WHEREAS, effective August 1, 1998, the Sponsor wishes to add the Minimum Required Distribution (MRD) service under the Trust; and NOW THEREFORE, in consideration of the above premises, the Trustee and the Sponsor hereby amend the Trust Agreement by: (1) EFFECTIVE AS OF JULY 1, 1998: Amending and restating Schedule "B" in its entirety, as attached hereto, to reflect a revised Annual Participation Fee and a revised Trustee Fee. (2) EFFECTIVE AS OF AUGUST 1, 1998: Amending and restating Schedule "A" in its entirety, as attached hereto, to reflect the addition of the MRD service. IN WITNESS WHEREOF, the Trustee and the Sponsor have caused this Tenth Amendment to be executed by their duly authorized officers effective as of the day and year first above written. HAWAIIAN ELECTRIC INDUSTRIES, INC. FIDELITY MANAGEMENT TRUST BY: HAWAIIAN ELECTRIC INDUSTRIES, COMPANY INC. PENSION INVESTMENT COMMITTEE By /s/ Peter C. Lewis 7/30/98 By /s/ Cheryl L. Gladstone 8/14/98 ----------------------------- -------------------------------- Peter C. Lewis Date Vice President Date Member By /s/ Constance H. Lau 7/30/98 ----------------------------- Constance H. Lau Date Secretary and Member 2 SCHEDULE "A" ADMINISTRATIVE SERVICES ----------------------- Administration - -------------- * Establishment and maintenance of Participant account and election percentages. * Maintenance of the following plan investment options: - Fidelity Retirement Money Market Portfolio - ASB Money Market Account - HEI Common Stock Fund - Fidelity Puritan Fund - Fidelity Magellan Fund - Fidelity Overseas Fund - Fidelity Freedom 2000 Fund - Fidelity Freedom 2010 Fund - Fidelity Freedom 2020 Fund - Fidelity Freedom 2030 Fund - Fidelity Freedom Income Fund - Spartan U.S. Equity Index Fund - MAS Value Portfolio Adviser - Neuberger&Berman Partners Trust - PBHG Emerging Growth Fund - Fidelity U.S. Bond Index Fund * Maintenance of the following money classifications: - Salary Reduction - Participant Voluntary - Rollover - HEI Diversified Plan - Employer ASB - Employer Supplemental - IRA - Voluntary HEISOP - Employer HEISOP * Processing of investment option trades. The Trustee will provide only the recordkeeping and administrative services set forth on this Schedule "A" and no others. 3 Processing - ---------- * Weekly processing of contribution data and contributions * Processing of transfers and changes of future allocations via the telephone exchange system * Daily processing of withdrawals Other - ----- * Monthly trial balance * Quarterly administrative reports * Quarterly participant statements * 1099Rs * Participant Loans * Periodic meetings with Sponsor * Educational services as needed and mutually agreed upon by the Trustee and the Sponsor. * Minimum Required Distribution service HAWAIIAN ELECTRIC INDUSTRIES, INC. FIDELITY MANAGEMENT TRUST BY: HAWAIIAN ELECTRIC INDUSTRIES, COMPANY INC. PENSION INVESTMENT COMMITTEE By /s/ Peter C. Lewis 7/30/98 By /s/ Cheryl L. Gladstone 8/14/98 ----------------------------- -------------------------------- Peter C. Lewis Date Vice President Date Member By /s/ Constance H. Lau 7/30/98 ----------------------------- Constance H. Lau Date Secretary and Member 4 SCHEDULE "B" FEE SCHEDULE ------------ Recordkeeping Fees - ------------------ * Annual Participation Fee $5.00 per participant** per year, billed and payable quarterly. * Minimum Required Distribution (MRD): $25.00 per MRD recipient per year. * Plan Establishment Fee $2,500.00 * Loan Fee Establishment fee of $35.00 per loan account; annual fee of $15.00 per loan account.** * Plan Sponsor WebStation (PSW): All User ID fees waived. * Other Fees: extraordinary expenses resulting from large numbers of simultaneous manual transactions or from errors not caused by Fidelity. ** This fee will be imposed pro rata for each calendar quarter, or any part -------- thereof, that it remains necessary to keep a participant's account(s) and/or loans(s) as part of the Plan's records, e.g. vested, deferred, forfeiture, top- heavy and terminated participants, if applicable, who must remain on file through the calendar year-end for 1099R reporting. Trustee Fee - ----------- Investment Options * Sponsor Stock: 0.10% per annum of such assets in the Trust payable quarterly on the basis of such assets as of the average market value for each calendar quarter. In no event will the fee be less than $10,000 nor more than $35,000 per year. * Others: None. 5 HAWAIIAN ELECTRIC INDUSTRIES, INC. FIDELITY MANAGEMENT TRUST BY: HAWAIIAN ELECTRIC INDUSTRIES, COMPANY INC. PENSION INVESTMENT COMMITTEE By /s/ Peter C. Lewis 7/30/98 By /s/ Cheryl L. Gladstone 8/14/98 ----------------------------- -------------------------------- Peter C. Lewis Date Vice President Date Member By /s/ Constance H. Lau 7/30/98 ----------------------------- Constance H. Lau Date Secretary and Member 6 -----END PRIVACY-ENHANCED MESSAGE-----